The Fed’s Losses, Atlanta’s Lesson, and the Case for Balance-Sheet Reform

Why one Fed bank remained in the black while the rest fell into losses—and what that means for the future operating framework.

President Trump will soon announce his pick for the next Federal Reserve Chair. Whoever takes the helm will inherit a full plate of challenges from Jerome Powell: interest-rate decisions, balance-sheet runoff, payment-system reform, regulatory overhaul, growing political pressures, and more. One thing the new chair will not inherit, however, is a Federal Reserve still incurring operating losses.

Yes, as our friend Bill Nelson first reported, the Fed is now generating net interest income for the first time since August 2022. Here is Bill:

Here is something to be thankful for this Thanksgiving: The Federal Reserve System has returned to profitability.  It appears to be on track for the combined profits of the 12 Fed banks to be over $2 billion in the current quarter… It lost about $240 billion to date.  These are real losses borne by taxpayers… If Atlanta and St. Louis continue to have profits of about $110 million per week, and the deferred asset continues to increase (become less negative) as it has done over the past two weeks…the Fed’s profits for the entire quarter will be $2.3 billion.

The primary reason for the recent losses is that the Fed’s interest expenses exceeded its interest income. This gap emerged because the Fed’s non-currency liabilities (bank deposits and ON-RRP balances) are extremely short-term and reprice almost immediately when interest rates rise, while its assets are longer-term, adjust more slowly, and were accumulated under QE during a period of very low rates. In effect, the Fed was carrying substantial interest-rate risk arising from a pronounced duration mismatch—a structure similar to that of many commercial banks—which left it vulnerable to rapid interest-rate hikes. And that is exactly what happened from 2022 to 2023.

Fortunately, the losses are ending, but as Bill notes, the Fed will continue to delay sending payments—“remittances”—to the U.S. Treasury for several years. Why does this happen and does it really matter? In this newsletter, I take up these questions by first examining the mechanics behind the Fed’s losses, both for the Federal Reserve System as a whole and for the exceptional case of the Federal Reserve Bank of Atlanta. I then show why the recent losses matter by exploring what the Fed’s time in the red implies for the future of its balance sheet.

A Closer Look at the Fed’s Losses

As noted above, the Fed’s losses arose because interest expenses exceeded interest income following the sharp interest-rate hikes of 2022–2023. To avoid reporting negative equity, the Fed recorded its cumulative losses as a “deferred asset.” This item represents the amount of future profits the Fed must retain—rather than remit to the Treasury—until past losses are fully offset. In effect, the deferred asset acts as an accounting buffer that must be rebuilt before any payments can resume. As a result, the Fed’s remittances to the Treasury have been zero since September 2022 and, according to New York Fed projections, will remain so for several more years. That means larger budget deficits than would otherwise be the case.

The amount of this deferred asset can be seen by looking at the Fed’s H.4.1 series titled “Earnings Remittances Due to the U.S. Treasury.” The Fed explains this series as follows:

Positive amounts represent the estimated weekly remittances due to U.S. Treasury. Negative amounts represent the cumulative deferred asset position, which is incurred during a period when earnings are not sufficient to provide for the cost of operations, payment of dividends, and maintaining surplus. The deferred asset is the amount of net earnings that the Federal Reserve Banks need to realize before remittances to the U.S. Treasury resume.

Below is this measure. It shows that as of December 3, 2025, the Fed’s deferred asset is $243 billion.

The good news is that the Fed is generating net interest income again. This can be seen by taking the first difference of the deferred asset. It shows a positive value for the past few weeks, indicating the Fed is profitable now:

The Fed’s net interest income position has improved as interest expenses have declined with the reduction in short-term rates, while interest income has risen as higher-yielding securities have entered the portfolio through ongoing reinvestments. Together, these developments have narrowed the duration-mismatch gap and recently returned the Federal Reserve System to profitability.

Below is a table showing the Fed’s interest income, interest expense, and net interest income since 2008, the year the Fed effectively adopted an ample-reserves system. The last row shows the Fed’s financial position for the year through 2025Q3. This comes from the latest Fed financial statement and shows a stark improvement for the Fed’s bottom line.

Despite the losses of the past few years, it is worth noting that the ample-reserves framework generated roughly $1.2 trillion in net interest income through 2022. Some of these earnings covered operating expenses, but most of it was remitted to the federal government.

The final two columns above show the contributions to net interest income coming from the two major funding sources for the Fed: currency and interest-earning liabilities (i.e. bank deposits and ON-RRP balances). Historically, the Fed’s “currency franchise”—its ability to issue non-interest-bearing liabilities—has been its golden goose, providing an inexpensive and stable funding base for most of its operations. But that dynamic shifted with the advent of the ample-reserves system, which made bank deposits and ON-RRP balances the dominant source of funding for the Fed’s asset holdings. These liabilities funded greater interest earnings for the Fed, but also made the central bank more susceptible to interest rate risk as we have seen in the past few years.

The Amazing Federal Reserve Bank of Atlanta

Amidst a sea of red ink across the Federal Reserve System, one island of profitability remained above the waves: the Federal Reserve Bank of Atlanta. While every other Fed bank slipped into negative net interest income, Atlanta kept generating profits and, for most of the period, continued sending remittances to the Treasury. This can be seen in the table below, which reports the sources and contributions to net interest income for the Atlanta Fed:

What makes Atlanta’s performance so striking is how different its funding structure looked from the rest of the System. As the table shows, the Atlanta Fed continued to rely primarily on currency issuance—the Fed’s traditional, low-cost funding source—to support its asset holdings. While other Fed banks saw their balance sheets increasingly financed by bank deposits and ON-RRP balances, whose interest costs skyrocketed with the 2022–23 rate hikes, Atlanta held firmly to its currency base. This funding mix insulated the Bank from much of the duration mismatch that hammered the rest of the Fed, allowing it to remain consistently profitable even as its peers slid deep into negative net interest income.

I recently discussed this cash-driven funding advantage with Atlanta Fed President Raphael Bostic on my podcast, where he emphasized how the bank’s currency operations helped keep it in the black during the system-wide losses. He noted that demand for cash in Miami is particularly strong. This segment begins at 14:01 in the video below.

The importance of the Atlanta Fed’s cash operations can be seen in the figure below. It shows that the bank’s share of assets funded by currency not only remained the highest in the Federal Reserve System, but it stayed dramatically elevated throughout the ample-reserves era. While the rest of the Fed saw currency fall to a minority share of total funding, Atlanta’s ratio held firm, often exceeding 70 percent. This persistent reliance on the Fed’s “currency franchise” provided a remarkably stable buffer against rising interest expenses and, in effect, kept Atlanta financially afloat while the rest of the Fed was submerged by losses.

Why Does This Matter?

The Atlanta Fed may have avoided the interest-rate storm, but the rest of the Federal Reserve System did not—and the consequences of those losses reach far beyond reserve bank income statements. They spill into the federal budget, they expose structural vulnerabilities in the Fed’s balance sheet, and they point toward deeper challenges in a world where digital dollars are gaining momentum. This is why the question of “why this matters” is not merely academic. It bears directly on the Fed’s independence and the architecture of monetary policy in the years ahead.

The losses didn’t impair monetary policy, but they weren’t free.

Let’s start with the obvious: the Fed’s losses did not prevent it from tightening monetary policy in 2022–23 and keeping rates elevated through late 2024. As the past few years showed, the Fed can operate in the red and still raise interest rates aggressively when necessary. The mechanics of a central bank allow this.

But that does not mean the losses were costless. When the Fed’s interest expenses exceeded its income, remittances to the Treasury vanished and were replaced with a growing deferred asset—an accounting device that pushes losses into the future by withholding what otherwise would have been payments to the federal government. As Bill Nelson has emphasized, these losses effectively function as a tax because they reduce Treasury revenues and thereby widen the federal deficit borne by taxpayers.

It is true, as noted earlier, that the Fed has earned far more in cumulative profits during the QE era—roughly $1.2 trillion—than the $240 billion in losses suffered recently. But that is precisely what makes the transparency issue so important: the gains arrived as quiet windfalls, while the losses materialized in an obscure accounting construct that hides the timing and magnitude of the transfer. The asymmetry between visible losses and invisible gains amplifies misunderstanding and fuels political suspicion.

And losses inevitably invite political blowback. Calls to eliminate interest on reserves or otherwise reshape the Fed’s operating framework are already emerging. Without a more transparent accounting of gains and losses, the Fed risks having its independence eroded by misconceptions about what these transfers mean and whom they benefit.

The episode reveals deep structural vulnerabilities in the Fed’s balance sheet.

A second reason this experience matters is that it exposes the Fed’s balance sheet to recurrent interest-rate risk. As the recent losses made painfully clear, the Fed’s current operating framework all but guarantees periodic bouts of duration mismatch. QE will be used again the next time the zero lower bound is hit and when it is the Fed will once more accumulate long-duration assets funded by short-duration liabilities. QE1–QE3 were “lucky” in the sense that short-term rates stayed low for over a decade; but 2021–22 showed that luck is not a strategy.

In From Floors to Ceilings, I outlined a plan that, if applied systematically, would dramatically reduce the Fed’s exposure to the financial—and related political—risks created by these recurring interest-rate mismatches. Rather than relying on traditional QT, this approach consists of three steps:

1. Do a Treasury–Fed asset swap to reduce duration mismatch and enable a more orderly balance-sheet reduction.

2. Neutralize the TGA’s volatility, so fiscal cash management doesn’t destabilize the Fed’s liabilities.

3. Normalize the use of ceiling facilities—the Standing Repo Facility and the Discount Window—to support a demand-driven ceiling system.

This three-step framework would allow QE to be deployed when needed, but without leaving a noose around the Fed’s neck afterward. It would also make it far easier for the Fed to move between a crisis-time ample-reserves framework and a normal-time lean, demand-driven ceiling system.

Stablecoins shift the ground beneath the Fed’s balance sheet.

A third reason this entire episode matters—and one that reaches beyond the Fed’s recent losses—is that it highlights how the rise of dollar-based stablecoins could threaten the strongest and most stable component of the Fed’s balance sheet: its currency franchise.

As I discuss in Barbarians at the Fed’s Gate, widespread adoption of digital dollars could steadily displace physical currency. Physical currency provides the Fed with zero-cost funding; stablecoins do not. Jim Clouse estimates that under plausible scenarios, declining currency demand could reduce cumulative Fed income by $1.5 to $2.5 trillion over the next 30 years. That kind of erosion would fundamentally alter the economics of the Fed’s balance sheet. For example, imagine how much worse the recent Fed’s losses would have been had there been no currency funding.

The experience of Sweden’s Riksbank—which has already seen physical currency fall to minimal levels—is instructive here. It was forced to require banks to hold some of their deposits at the central bank in non-interest-bearing accounts in order to preserve the central bank’s financial independence. In other words, the Riksbank had to manufacture something like a new currency franchise once the old one evaporated. The Fed may face a similar dilemma if stablecoins take off.

One potential solution for the Fed on this front could come from the proposed “skinny master account,” which would allow eligible nonbank payment providers, including stablecoin custodians, to hold balances at the Fed that earn 0 percent interest. While not designed with seigniorage in mind, such accounts could serve as an accidental lifeline by giving the Fed a new pool of zero-cost funding in a world where digital dollars hollow out demand for physical currency.

Conclusion

In the end, the Fed’s losses are not the story, they are the signal. They reveal how the Fed’s operating framework, balance-sheet structure, and liability mix have become increasingly fragile in a world of higher rates and fast-moving digital finance. They expose hidden fiscal transfers, amplify political vulnerabilities, and highlight the need for a more transparent and more resilient approach to balance-sheet management. And as stablecoins begin reshaping the demand for Fed liabilities, the pressures will only intensify. If the Fed wants to preserve its independence and regain control over the size and risk profile of its balance sheet, it needs an operating framework built for the world we are entering, not the one we have left behind.