Fed posts smaller loss on operations in 2024

By Michael S. Derby

(Reuters) - The Federal Reserve said on Friday it generated a smaller loss on its operations last year than in 2023 as its ongoing work to contain inflation kept its books in the red. 

The U.S. central bank said the total distribution of its comprehensive net loss last year stood at $77.5 billion versus $114.6 billion in 2023. The Fed last turned a profit in 2022. 

The reported loss for 2024 is a final audited number, and with the Fed breaking this year with a multi-year practice of releasing a preliminary number at the start of the year, it is also the public's first look at the official state of central bank finances for the full year. 

The Fed's presentation of its financial situation also changed. In recent years it made public the information summed up in a press release, whereas this year's figures were made public in a 65-page document. 

Although it has yet to emerge as an issue, Fed loss-making has driven ongoing concerns that it could attract unfavorable attention from lawmakers. Those fears have grown as President Donald Trump and his ally Elon Musk, both of whom have been critical of the central bank, push an aggressive plan to downsize government and slash spending.

As it was in 2023, the Fed's loss last year was primarily driven by the mechanics of its efforts to bring high levels of inflation down. The central bank is self-funding, earning money from the securities it owns and the services it provides to the financial sector. By law, the Fed gives the U.S. Treasury any excess earnings, and in recent years, those sums have been quite large. 

But the landscape began to change in 2022. Faced with the highest levels of inflation in decades, the Fed aggressively raised the range of its short-term interest rate from near-zero levels that spring to a peak of 5.25%-5.50% by July 2023. It has since lowered that rate by a percentage point due to a drop in inflation, helping to reduce the 2024 loss, with monetary policy currently in a holding pattern. 

The Fed pays banks, money market funds and other eligible firms to park cash with it as part of technical operations to manage its interest rate target. Its interest costs have surged and outstripped its earnings, leading to paper losses that central bankers have said repeatedly do not affect their ability to operate and conduct monetary policy.

The Fed said that its total interest-related costs in 2024 stood at $226.8 billion, compared to $281.1 billion in the previous year. It earned $158.8 billion in interest income last year, versus $174.5 billion in 2023. 

As the Fed can print money to fund its operations, it tallies its overall loss via an accounting measure called a deferred asset. That figure stood at $224.4 billion as of Wednesday. 

When the Fed returns to profitability, it will pay down that loss. When that figure hits zero, the central bank will again begin to return cash to the Treasury. Analysts believe it could be years before the Fed finds itself in that situation.

(Reporting by Michael S. Derby; Additional reporting by Ann Saphir; Editing by Paul Simao)