The U.S. Federal Reserve ended 2024 with more than $1 trillion in paper losses on its securities holdings, according to the central bank’s latest audited financial statements for the year. The losses, which are technically unrealised, reflect the ongoing impact of the central bank’s aggressive interest rate hikes on the value of its massive portfolio of U.S. treasury bonds and mortgage-backed securities (MBS).

At the close of 2024, the Fed reported that the fair value of its domestic securities portfolio had fallen to $5.69 trillion, down significantly from the $6.75 trillion in amortised cost — the amount the Fed originally paid for the securities. This resulted in a total unrealised loss of $1.064 trillion, surpassing the $948 billion mark recorded just a year earlier. These losses are not cash losses but represent how much the Fed would lose if it were to sell the securities at their current market value.

The central bank, however, posted lower losses in 2024 at $77.5 billion against $114.6 billion seen in 2023. While, since 2022, the Fed had aggressively raised its short-term interest rate from near-zero levels to a peak of 5.25%-5.50% by mid of 2023, it has since lowered the rates to 4.25%-4.5% owing to a drop in inflation, in turn, reducing losses for the year. The Fed also reported realised losses as it sold securities at a net loss of $107 million, reflecting a partial recognition of losses that had previously only existed on paper.

But importantly, the central bank’s total assets have dropped by more than $767 billion in 2024 as it continued to unwind its pandemic-era balance sheet expansion. Total assets fell from $7.84 trillion in 2023 to $7.07 trillion at the end of 2024, marking a significant contraction driven by reduced holdings of Treasury and mortgage-backed securities.

The balance sheet shrinkage reflects the Fed’s ongoing quantitative tightening campaign — a reversal of the extraordinary asset purchases made during the COVID-19 crisis. In 2024, the Fed allowed large volumes of maturing securities to roll off without reinvestment, leading to a half-trillion-dollar drop in Treasury holdings and a $204 billion reduction in agency mortgage-backed securities.

However, the Fed’s financial stress -- operating losses and $1.06 trillion in unrealized losses -- have cut off remittances to the U.S. Treasury. Normally, the Fed returns billions in surplus earnings to the government each year — funds that help offset the federal deficit. As a result, “deferred asset” on the Fed’s books ballooned from $133 billion to $216 billion, reflecting cumulative net losses. The deferred asset is the amount of net excess earnings the Fed will need to realise in the future before remittances to the Treasury resume, and the deferred asset is reviewed for impairment periodically.

The balance sheet also shows a steep decline in emergency lending activity. “Other loans,” which surged to over $130 billion during 2023’s banking turmoil, dropped to just $6.4 billion by year-end 2024.

While a central bank cannot go bankrupt — and can hold assets to maturity without realising losses — the effects of its operating position are very real. For an administration trying to rein in spending while managing rising geopolitical tensions and domestic economic needs, the Fed’s inability to remit surplus funds is a significant fiscal constraint. As long as interest rates remain elevated, the burden of losses isn’t going away anytime soon.

With the federal deficit now topping $1.8 trillion and interest payments nearing $1 trillion annually, not surprising the new presidential administration led by Donald Trump has begun a sweeping reassessment of U.S. spending priorities.