"The Federal Reserve" by futureatlas.com is licensed under CC BY 2.0
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For the first time in its history, the Federal Reserve is losing money. Lawmakers should be alarmed that the institution tasked with creating dollars is somehow operating at a loss and bring long overdue accountability to the institution.
The Federal Reserve recently reported an operating loss of $77.6 Billion in 2024. This was actually a substantial improvement over 2023, when the Fed posted its first loss ever at more than $114 billion. All losses are deferred for a few years before the debt must be retired at taxpayer expense if the Fed cannot on its own. Its balance sheet shows signs of stress in the wake of its reckless bond-buying splurge during the pandemic, when it purchased trillions in low-coupon, long-dated bonds.
The Fed accumulates assets on its balance sheet and the interest payments associated with them. On the liabilities side, the Fed credits depository institutions with currency, or reserves, which it now pays interest on as its primary monetary policy lever. This means that the Fed now only profits if the interest received on its assets exceeds interest paid on its liabilities.
In other words, the Fed (primarily) buys up debt and collects interest on it while adding money to the economy by depositing reserves in other banks, and the interest rates on those reserves set the cost of borrowing money. Inflation can rise if these are not properly balanced and interest is set too low; one of the only ways to combat inflation is for interest rates to rise, slowing down the economy.
Prior to quantitative easing conducted during the 2008 financial crisis, the Fed maintained a relatively risk-free portfolio. It did not pay interest on the liabilities it held, and it enjoyed a stable flow of interest income on risk-free treasuries on the asset side of its balance sheet.
Now, the Fed pays significant interest expenses on reserves claimed by banks and other depository institutions due to recent rate hikes, while simultaneously receiving smaller interest payments on riskier bonds and agency-backed securities purchased during the low-interest rate regime era of the pandemic. The Fed’s trillions of dollars of long-term investments, for example, now yield 2% but cost 4.6% to finance.
When inflation reared its head soon after the excessive monetary stimulus, the Fed was left with an unfavorable balance sheet position and a negative net interest rate margin likely to persist for the foreseeable future, costing taxpayers about $1.5 trillion in lost treasury remittances over the next two decades. These developments should prompt at least some scrutiny of the Fed’s operations and performance. However, the Fed will likely not face any consequences.
Compared to other agencies, the Fed operates with little oversight. While other agencies have Senate-confirmed inspectors general , the Fed’s inspector general is an employee handpicked by the chair. It should be noted the Government Accountability Office typically conducts comprehensive audits and reviews of agencies, but they are limited in reviews of the Fed’s operations.
This is especially concerning given the Fed’s recent spending spree. The Fed is currently spending $2.5 billion on new office spaces, which is the amount spent by similarly sized agencies on office renovations in recent years. Despite the institution’s capital expenditures tripling between 2019 and 2024 without any explanation, the GAO lacks the statutory authority to review or assess the Fed’s spending.
More evidence of the Fed’s imprudent spending patterns can be found in statistics related to personnel management. Since 2007, Fed employees saw a 67% increase in inflation-adjusted compensation compared to private-sector employees, whose compensation climbed 12% in the same time frame. Employment figures also raise concerns – since 2010, the Fed board oversaw a 20% increase in staff while other large federal agencies experienced a 9% decline. These patterns call into question the justification of Fed independence if the institution decides to abuse its autonomy with fiscal profligacy.
The Fed’s opposition to accountability measures rests on its belief that it would open avenues for political pressure to influence its decisions; however, the notion that any semblance of public transparency would impede the Fed’s ability to carry out its work is nonsense. The Bank of England and the European Central Bank are both held accountable by external agencies equivalent to an inspector general or GAO.
The Federal Reserve’s lack of transparency is concerning given its financial situation and propensity for frivolous spending. Taxpayers deserve a better understanding of how the Fed as an institution operates and manages itself as it plays an outsized role in steering the economy. The Fed should be held to the same standards as other government agencies instead of using the law to shield itself from any accountability over its spending and internal practices.
A good change would be allowing for the GAO to conduct performance audits. This is especially merited in light of the SVB bank collapse in 2023 and a bungled approach to fighting inflation after a toxic combination of excessive monetary and fiscal stimulus. Audits and reviews would shine a light into the Fed’s inefficiencies and promote much-needed scrutiny to address issues with personnel management and indulgent spending.
Legislation to increase Fed oversight and appoint an independent inspector general requiring confirmation by the Senate, even one immune from presidential firing like the governors, would also be a welcome endeavor. Congress should take action to end the culture of mismanagement, waste, and unrestrained spending at the Fed. That begins with forcing the agency to be transparent and holding it accountable for its policy and internal management decisions.
