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.
This paper examines the Federal Reserve’s current financial losses—unprecedented in scale—and the questionable accounting practices it uses to downplay their impact. It argues that the Fed’s self-defined accounting standards, particularly the creation of a “deferred asset” to mask negative equity, obscure the fiscal consequences for the U.S. government and taxpayers. The analysis connects today’s losses to longstanding institutional practices, notably the Fed’s flawed cost-recovery accounting for its Fedwire payment system. These issues first emerged in the late 1990s and early 2000s, when the author, then a Fed staffer, challenged the internal logic used to claim that Fedwire guaranteed payments and still avoided subsidies. The paper includes as an appendix the original 2002 draft, “Fedwire: A Subsidy That Fully Recovers Its Cost?”, which helped reveal the moral hazard and accounting inconsistencies that contributed to the 2008 crisis and continue to shape central bank risk and governance today.
