Federal Reserve ran worst annual operating loss ever of $114.3 billion: report

According to The Wall Street Journal, the massive deficit was caused by the bank jacking up interest rates to combat skyrocketing inflation and could continue as long as the short-term interest rates remain at the same levels.

The increase in interest rates caused the Fed to pay more out on interest-bearing deposits to financial institutions than it brought in on securities it purchased at lower rates trying to help the economy during the COVID-19 pandemic.

The Fed is required to give its profits over to the Treasury at the end of the year, which is used to help pay down the United States deficit. The end of 2022, when it began turning a loss, was the first time in 107 years that the bank had to suspend payments to the Treasury because of losses.

Since the Fed is not a government institution, it does not have to ask Congress to cover its debts. Instead, it classifies the loss as "deferred assets," which is essentially an IOU to the US Treasury. If the Fed continues to run at a loss, it will force the Treasury to sell more debt to pay its bills, increasing the national debt, with the taxpayers incurring the cost.

According to the Mises Institute, another way for the bank to recoup its losses would be to require commercial banks that are members of the Federal Reserve System to pay their share of the losses to the Fed to cover the total losses.

The Wall Street Journal reports that as long as interest rates are above 3.5 percent, the Fed will likely continue to operate at a loss.