Without transparent accounting practices and proper risk management, the Federal Reserve’s current financial losses—unprecedented in scale—and the questionable accounting practices it uses to downplay their impact threaten public trust, economic stability, and the integrity of fiscal policy.
The Federal Reserve is experiencing something new in its history: sustained and sizable operating losses. These losses—currently running at more than $100 billion a year on an annualized basis—stem largely from the sharp rise in short-term interest rates, which has increased the interest the Fed pays on bank reserves while the income from its long-term securities portfolio remains comparatively low.
At the same time, the Fed’s approach to accounting for these losses departs from the norms applied to other public and private institutions. Since 2010, the Fed has recorded them as a “deferred asset”—essentially the expectation of future earnings—rather than reducing its reported capital position. This treatment helps the Fed avoid reporting negative capital, but also makes it harder for the public to see the institution’s true financial condition.
My new INET Working Paper connects these current developments to a longer history of accounting choices—particularly those related to the Fed’s Fedwire payment system—that have tended to understate the costs and risks the central bank assumes.
Fedwire and Daylight Overdrafts
Fedwire is the Federal Reserve’s wholesale payment system, moving trillions of dollars daily between banks. One of its defining features is that the Fed guarantees each payment to the receiving bank, even if the sending bank does not have sufficient funds in its account at the moment of transfer. This practice can create “daylight overdrafts”—short-term intraday credit extended by the Fed.
The 1980 Monetary Control Act required the Fed to price its payment services, including Fedwire, to recover all direct and indirect costs over the long run, including an imputed return on capital and the cost of credit provided. Yet for decades, the Fed has excluded important components from its cost-recovery calculations, such as the foregone interest on daylight overdrafts and expenses incurred in monitoring and managing payment system risk.
The result is an apparent contradiction. In testimony to Congress, Fed officials have acknowledged that Fedwire access and daylight overdrafts represent part of a “safety net” subsidy to banks. At the same time, the Fed’s cost-recovery reports assert that Fedwire has fully recovered its costs year after year. Both cannot be true in the same sense.
From Payment Services to Balance Sheet Losses
The link to today’s losses lies in how the Fed manages the risks and costs of its own activities. Since 2008, the Fed has paid interest on reserves, encouraging banks to hold large balances at the central bank. This has helped reduce daylight overdraft exposures—but it also means that the Fed now pays substantial interest to banks, particularly in a higher-rate environment.
With the level of reserves now above $3 trillion, the cost of these interest payments has risen sharply, contributing to today’s operating losses. Those losses are then absorbed into the “deferred asset” account, avoiding an immediate impact on reported capital. This approach resembles the way some banks accounted for securities on a “held-to-maturity” basis—a method that came under scrutiny during the 2023 banking turmoil.
Why It Matters
Central banks can, in principle, operate with negative capital without immediate operational disruption. But the way losses are measured and reported still matters for transparency, fiscal policy, and public trust. The Fed’s accounting choices for both its payment system and its broader balance sheet have tended to minimize reported costs and risks. Over time, this can obscure the real economic implications for the U.S. Treasury and, ultimately, taxpayers.
The experience with Fedwire offers a reminder that the details of cost measurement, risk assessment, and accounting policy are not mere technicalities. They shape perceptions of central bank performance, influence incentives in the financial system, and determine how the burdens and benefits of central bank activities are distributed.
If we want to understand the Fed’s current losses—and their implications—it helps to look at how the institution has long handled the costs of the services it provides. Fedwire’s history shows that the question is not just how much the Fed earns or loses in a given year, but how it defines and measures those outcomes in the first place.
