US Central Bank Suffers Consecutive Deficits as Borrowing Expenses Exceed Revenue

The US Federal Reserve has posted its third consecutive annual operating loss, with the latest financial data revealing a deficit of $18.7 billion in 2025. This marks a continuation of the central bank's unusual financial slump, which commenced in 2023 following a prolonged period of substantial profitability. According to a recent analysis by The Kobeissi Letter, the Federal Reserve's total losses over the past three years have reached a staggering $210.3 billion, with the deepest loss occurring in 2023, followed by smaller deficits in 2024 and 2025.

The root cause of these losses can be attributed to the significant increase in interest payments to banks and money market funds, while income generated from bonds and mortgage-backed securities has remained subdued. This disparity between expenses and revenue has resulted in the Federal Reserve operating at a loss since September 2022, a stark contrast to its prior history of consistent profitability. Between 2000 and 2007, the central bank's earnings remained relatively stable, ranging between $20 billion and $35 billion.

However, the 2008 financial crisis marked a significant turning point, as the Federal Reserve's profits surged due to decreased policy rates and increased asset purchases. During the period between 2009 and 2015, the central bank's profits skyrocketed, peaking at approximately $115 billion. This was largely due to the fact that the Federal Reserve held substantial amounts of high-yielding securities, while funding costs remained near zero.

The tide began to turn as interest rates started to rise from 2016 to 2022, leading to a decline in profits, although they remained in positive territory, fluctuating between $55 billion and $105 billion. The Federal Reserve's financial landscape underwent a significant shift in 2023, as aggressive rate hikes led to increased borrowing costs, resulting in higher interest payments on reserves and reverse repurchase agreements. Conversely, the returns on its existing bond portfolio remained fixed at lower rates, causing expenses to outweigh income and culminating in the first annual loss in decades, totaling approximately $115 billion.

The deficit continued in 2024, albeit at a lower level of around $80 billion, before narrowing further in 2025. Notably, the Federal Reserve ceased transferring profits to the US Treasury, marking the end of a long-standing practice that had resulted in remittances exceeding $1.36 trillion since 2008. This change is a reflection of the central bank's current financial situation, rather than a structural constraint. Despite the losses, the Federal Reserve continues to operate normally, with its system allowing it to manage shortfalls without facing solvency concerns. The recent trend of narrowing losses, as evident in the 2025 figures, suggests a potential shift in the central bank's financial trajectory, with future results likely to be influenced by interest rate fluctuations and changes in funding costs.