By Wolf Richter for WOLF STREET.
The Fed disclosed two types of losses in its audited annual report today: An operating loss of $77.6 billion for the year 2024, substantially less bad than its operating loss in 2023 of $114 billion. And cumulative “unrealized losses” of $1.06 trillion at the end of 2024, on its holdings of Treasury securities and MBS, up from $948 billion at the end of 2023.
The operating loss of $77.6 billion derived mostly from its interest income being far lower than its interest expenses.
The Fed reported:
- $158.8 billion of interest income from its shrinking portfolio of Treasury securities and MBS, whittled down by $2.2 trillion in QT
- $0.3 billion in other income and losses, including $1.4 billion in losses from “foreign currency translation,” and income from various services it provides to banks and government agencies.
Minus…
- $186.4 billion in interest expense — Interest on Reserve Balances — that it paid banks
- $40.3 billion in interest expense on overnight reverse repos (ON RRPs) that it paid to its counterparties, mostly money market funds.
- $9.9 billion in operating expenses, including:
- $2.7 billion for the Federal Reserve Board of Governors including printing and managing the Federal Reserve Notes (the paper dollars)
- $4.2 billion in salaries
- $663 million in costs of the Consumer Financial Protection Bureau.
Interest rates on reserves and ON RRPs, among the Fed’s five policy rates, started rising in 2022 with the rate hikes. But the dollar amounts got smaller as the Fed shed securities via its QT program: By the end of 2024, ON RRP balances were largely gone, having dropped by over $2 trillion from their peak in 2021, but reserves were roughly unchanged and still over $3 trillion.
In addition, the rate cuts in late 2024 lowered the amounts in interest that the Fed paid on reserves and ON RRPs. Hence the smaller losses in 2024.
On a quarterly basis, the Fed started booking operating losses in Q4 2022.
The “unrealized losses.”
The Fed’s cumulative “unrealized losses” on its holdings of Treasury securities and MBS rose to $1.06 trillion at the end of 2024, from $948 billion at the end of 2023.
The losses got bigger because longer-term yields rose in the final months of 2024, following the Fed’s monster rate cut in September 2024. Higher yields mean lower market prices for longer-term bonds.
These cumulative unrealized losses are the difference between the securities’ amortized cost (which will be equal to face value by the time the security matures) and their market value at the end of the year:
- Securities at amortized cost: $6.75 trillion
- Market value at year-end: $5.69 trillion
- Cumulative unrealized loss: $1.06 trillion.
The Fed bought most of these securities years ago when yields were far lower than at year-end 2024. As yields on Treasury securities and MBS rose starting in 2021, their market values declined.
As Treasury securities get closer to their maturity date, the unrealized losses diminish and become zero when the securities mature because the holder gets paid face value.
MBS are paid back mostly via passthrough principal payments as the underlying mortgages are paid off when the home is sold or refinanced, and as regular mortgage principal payments are made. When the pool of underlying mortgages shrinks enough, the MBS are “called,” and the holder gets paid face value for the remaining balance. It’s unlikely that any of the MBS will still exist by their maturity date; the Fed will get its money back much sooner.
Unrealized losses represent the losses the Fed would have incurred if it had sold all its securities at market prices at the end of 2024.
If the Fed never sells any of these securities, but waits till they mature, at which point it gets paid face value, those unrealized losses vanish without a trace.
The dividend.
Despite the losses, the Fed paid the statutory dividend, as required by the Federal Reserve Act, to the shareholders of the 12 Federal Reserve Banks. The annual report describes the formula laid out in the FRA for how the dividends are calculated.
In 2024, the Fed paid $1.62 billion in dividends (up from $1.48 billion in 2023).
Losses don’t matter to the Fed but matter to the Taxpayer.
The Fed creates its own money and therefore cannot become insolvent. So to the Fed, these losses are just a visual blemish.
But these losses matter to the Treasury Department – and thereby the taxpayer. The Fed has to remit nearly all of its operating income to the Treasury Department (similar to a 100% income tax). Those remittances stopped when the Fed stopped generating operating income in September 2022.
From 2008 through September 2022, the Fed remitted $1.36 trillion to the Treasury Department. At Treasury, these funds became part of the flow of tax receipts.
QE was a huge gravy train for taxpayers, as the Fed loaded up on securities, generating remittances of $1.1 trillion from 2009 through Q3 2022. But the flow of these funds to Treasury stopped with the losses in September 2022.
The losses pile up as a negative liability on the Fed’s balance sheet – the negative amount due the Treasury Department – that keeps getting larger.
As of the balance sheet on Thursday, that negative amount reached -$224 billion, representing the total cumulative operating losses from September 2022 through Wednesday.
The Fed’s operating losses will continue to decline for a while, but as long as it has any operating losses, the cumulative negative amount grows. When the Fed starts generating operating income again, it will go against that negative amount and whittle it down over time. Remittances to Treasury will restart after the negative balance has been reduced to zero, and that account then turns positive. This will take years.
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