Fed projected to turn profitable again after three years of losses

After three years of unprecedented losses, the US Federal Reserve projects that it will return to profitability, generating operating income in excess of operating costs, in 2026. The rebound reflects the slow runoff of low-yielding assets—accumulated from 2008 to 2022 during its stimulus programs known as quantitative easing (QE)—and the expected stabilization of short-term interest rates after the rapid increases of 2022–23.

The Fed’s balance sheet, traditionally a quiet corner of the international financial system, became more volatile in recent years. The Fed’s operating income, mostly earned from interest on Treasury securities, was once steady, uncontroversial, and largely of interest only to central bankers. But that changed during the QE period. A glance at a chart of the net income of the Fed’s System Open Market Account (SOMA), which holds most of the Fed’s interest-earning assets, reveals the story vividly: A placid blue line becomes jagged following the introduction of QE in 2008.

Before the 2008 global financial crisis, the Fed’s balance sheet was relatively small. Income came from interest paid on a portfolio of Treasury bills and bonds. The associated liabilities were almost entirely paper currency that paid no interest. With interest rates above zero, the Fed earned reliable income each year, used some of the money to cover its operating costs, and returned the remainder to the Treasury Department. The Fed, as a government agency, does not keep any profits for itself.

The Fed first launched QE in late 2008 as an economic stimulus program to combat the Great Recession. It purchased longer term Treasuries and mortgage-backed securities to further stimulate the economy as short-term interest rates approached the zero lower bound. Because demand for paper currency is fixed, the Fed had to issue and pay interest on short-term liabilities such as bank reserves to fund the QE purchases. As long as short-term rates stayed low, the Fed could pay minimal interest on those liabilities while earning more on its longer-dated assets. The result was a surge in the Fed’s net income to an annual peak of $106 billion, equal to 0.61 percent of US GDP in 2014, and higher remittances to the Treasury.

But that dynamic reversed sharply in 2022. As the Fed rapidly raised interest rates to combat inflation, the cost of paying interest on reserves soared. Meanwhile, its assets, locked in at earlier, lower rates, did not adjust as quickly. By September 2022, net income turned to net losses, plunging to levels never seen before in the SOMA’s history.

The shaded portion of the chart shows Fed projections, which anticipate a return to profit in the years ahead. Even including the projected losses in 2023–25, SOMA net income is expected to average 0.33 percent of GDP from 2009 through 2034, higher than the 0.29 percent of GDP average from 1985 through 2008. However, this comparison may be misleadingly close, as profits were already trending downward prior to QE and likely would have declined further without it.

These losses do not impair the Fed’s ability to conduct monetary policy. The central bank, unlike a traditional corporation, can lose money for a sustained period. But in an increasingly politicized age, optics matter. At a time when trust in institutions is already fragile, public misunderstanding of these losses could complicate communication and erode support for the Fed’s independence.

Data Disclosure

The data underlying this analysis are available here.