The Federal Reserve System has unique powers among Congressionally-chartered government bodies, and yet its powers do not include the authority to borrow money at taxpayer expense to pay for huge accumulating losses without Congressional approval. The Fed has invented its own unique financial accounting standard to disguise the fact that, under normal accounting rules, the system is deeply insolvent. From 2022 through 2025, the Fed system’s accumulated losses have completely consumed the system’s capital and forced the Fed to borrow over $185 billion more than the Fed owns in assets just to pay its bills—a fact it intentionally tries to hide from the public.
Rather than earning seigniorage profits for taxpayers, something the Fed did for more than 100 years, the present-day Fed has instead accumulated losses of the staggering amount of $231 billion. These losses reflect Fed expenses that, between 2022 and 2024, included over $420 billion paid to banks in interest on their deposits held at the Fed and over $185 billion in interest paid to other financial institutions on repurchase agreement loans; in addition, the Fed made over $4 billion in dividend payments to Fed member banks on their Fed district bank stock.
However unique, the Fed ultimately is a government agency. When it is making losses, the Fed’s annual expenses are paid by taxpayers and are a direct cost of running the government. When Fed expenses exceed Fed revenues, the Fed borrows to pay its bills. When accumulated Fed losses exceed the Fed’s capital—as they do today—the amount the Fed has borrowed in excess of the value of the Fed’s assets is a contingent taxpayer liability.
Under current accounting standards, neither Fed cash losses nor the taxpayer contingent liability created by accumulating Fed losses are reflected in the annual federal budget. This is problematic. The Fed should be transparent and accountable to taxpayers for its expenditures, just like any other federal agency—but it clearly is not. There is a simple, if politically difficult, two-part solution: (1) The Fed should be required to prepare its financial statements using generally accepted accounting standards; and, (2) The Fed’s consolidated system operating costs and the contingent taxpayer liabilities associated with its negative capital should be reported in the notes to the annual federal budget.
The Fed constantly asserts its “independence.” Fed independence may be interpreted to mean that, except in national emergencies, the Fed should be permitted to set interest rates without executive branch interference. The president and designees are free to express displeasure with the Fed’s monetary policy, but they should not be allowed to force the Fed to adopt a particular monetary policy preferred by the president.
However, the Fed remains unquestionably accountable to Congress, which retains plenary oversight responsibility and authority over it. Congress is not only free to criticize any aspect of the Federal Reserve, but also to pass legislation to direct how the Fed conducts monetary policy, manages its risk, accounts for its results, or discharges any of its other duties. As Thomas McCabe, then Chairman of the Federal Reserve Board,
expressed with great clarity: “The Federal Reserve Act … provided that the Federal Reserve should have independent status in the government structure, reporting directly to the Congress.”
Until recently, consolidated Fed system revenues exceeded its operating expenses and member bank dividend payments, allowing the Fed to remit
billions of dollars to the US Treasury each month. Now, the Fed has enormous and continuing cash operating losses. By May 28, 2025, the Fed’s operating losses have accumulated to reach a mind-numbing value of
$231 billion.
There is no explicit provision in the Federal Reserve Act or other law that empowers the Fed to borrow money at taxpayer expense, off the books of the Federal government, to pay expenses in excess of Fed income without Congressional approval. Yet the Fed has been doing exactly that since
March 2023, when its accumulated losses surpassed its total capital. To date, the Fed’s liabilities exceed the book value of its assets by $185 billion. The Fed has had to borrow this amount to pay its expenses and to pay dividends to its private shareholders, while it has no profits and no retained earnings.
Fed member bank dividends are cumulative by law. However, the act of borrowing to pay rather than cumulate dividends payable puts member bank interests ahead of taxpayers. Moreover, the payment of dividends in the absence of revenues in excess of expenses seemingly violates the Federal Reserve Act, which
explicitly conditions member bank dividend payments: “After all necessary expenses of a Federal reserve bank have been paid or provided for.” Under this requirement, if the Fed is losing money after paying its expenses, there is obviously nothing left to pay dividends.
Instead of reporting its financial results in a forthright manner, the Fed adopted nonstandard accounting practices to hide the financial impact of its accumulating cash losses. It classifies its accumulating cash losses as a “deferred asset” so that its reported retained earnings remain unchanged despite its massive losses. The Fed uses accounting rules of its own creation to obscure the fact that the consolidated Federal Reserve System has negative capital and is borrowing scores of billions of dollars off-budget to pay interest and dividends to banks and other financial institutions.
In short, the Fed’s accounting pretends that its losses are an asset and that its losses do not reduce its capital. The Fed adopted this accounting practice in 2011 when it recognized that its massive “quantitative easing” securities purchases could potentially create Fed losses under its post-financial crisis policy of paying interest on bank reserves, as indeed they did in time. Its solution was “just change the accounting” so cash losses would misleadingly appear not to affect the Fed’s capital. To add insult to injury, the Fed’s annual operating expenses and accumulated borrowings are not included in official federal budget accounts, even though these borrowings are ultimately a taxpayer liability resulting from a real federal government operating expense.
Congress explicitly delegated the power to set the accounting standards used to prepare the financial statements of the government agencies that are consolidated in the federal budget to the Federal Accounting Standards Advisory Board (
FASAB). The FASAB
designed its accounting standard to facilitate public evaluation of each reporting entity’s services and costs as well as the management of its assets and liabilities, thereby ensuring that the entity’s officials are “publicly accountable for monies raised through taxes and other means.” The Government Accountability Office, the Office of Management and Budget, and the Treasury Department are jointly responsible for overseeing the FASAB.
For federal budget accounting purposes, the FASAB classifies the Fed as a “disclosure entity”—an entity whose budgetary impact is recognized only in the notes to federal government consolidated accounts, and in the Fed’s case, recognized only to the extent that it remits revenues to the US Treasury. The Fed’s operating expenses are not separately disclosed.
If you peruse the
notes to the consolidated federal budget financial statements and are not deeply invested in legal minutiae, you might think that the consolidated Federal Reserve System made money in 2023 and 2024. By law, Fed remittances to the Treasury are made separately by the twelve district reserve banks, and only a few district reserve banks had revenues that exceeded expenses and dividend payments in 2023 and 2024. These cash remittances to the Treasury were overwhelmed by tens of billions of cash operating losses at the remaining federal reserve district banks, and yet the Fed’s consolidated cash losses, despite being an undeniable cost of government, do not appear anywhere in the notes to the combined federal budget accounts.
The Federal Reserve should not be permitted to make up its own accounting rules in order to hide its losses and negative capital.
While the FASAB does not set accounting standards for disclosure entities, regulators have required federal government-sponsored corporations such as the Federal Home Loan Banks, Fannie Mae, and Freddie Mac to use Securities and Exchange Commission-approved public accounting standards when preparing their financial statements, notwithstanding the fact that they, too, are federal budget disclosure entities. As far as we can determine, the Federal Reserve’s claim that it has the power to determine its own accounting standards without the external input or approval of a duly designated accounting standard-setting body is unique among large federal budget disclosure entities.
The private ownership of the stock of the Federal Reserve’s district banks explains why the Fed is not consolidated in federal budget accounts. The stock of the twelve district Federal Reserve banks is 100 percent owned by their private member banks. The shareholders elect two-thirds of each bank’s board of directors, which appoints the president of the bank with Federal Reserve Board approval. These privately owned twelve district banks hold member bank deposits, issue Federal Reserve Notes, borrow on repurchase agreements, lend to banks, process vast payment transactions, invest a combined more than $6 trillion in Treasury debt and mortgage-backed securities, and generate the combined Federal Reserve System profits or losses.
The combined operating loss of $231 billion so far suffered by the Federal Reserve banks has accrued because the interest the Fed pays on deposits and borrowings vastly exceeds the interest it earns on its assets. For the combined system and nine of the twelve district banks individually, the accumulated operating losses by far exceed the paid-in capital and surplus, making nine district banks and the system technically insolvent on a GAAP basis.
Under the Federal Reserve Act, the stockholders of the insolvent district reserve banks—Federal Reserve member banks—are in part liable for the capital shortfall of their insolvent district bank. According to the Act, should there be a need to fortify any Federal Reserve district bank’s resources, member banks are subject to call on the second half of their equity subscription [12 U.S.C. § 282]. For the Fed shareholders in total, the amount subject to call is $39 billion. The Federal Reserve Board could simply issue a call for this additional capital, and the Fed member banks would have to comply.
In addition, the Act includes the little-known shareholder contingent liability that member banks may be required to contribute an additional amount to cover district reserve bank operating losses up to an amount equal to their membership subscription [12 U.S.C. § 502]. This would be an assessment, not a stock purchase. For Fed shareholders in total, the current maximum potential assessment is $78 billion. The Fed needs only to say, “Send us the money!”
But the Fed has not exercised its authority either to call additional member bank capital contributions or to impose assessments authorized by the Act to make up for some of the losses. Instead of raising capital, the Fed created its nonstandard accounting that allows it to hide the fact that the combined system and nine of the twelve district banks are GAAP insolvent. Unbelievably, the book surplus account balances the Fed reports are not reduced by its giant operating losses, thanks to the “deferred asset” gambit. The dividends to member banks that the Fed keeps paying despite the lack of profits and negative real capital are also treated as part of the ignominious “deferred asset.”
While the Fed’s published financial statements suggest that operating losses can be covered merely by creating an accounting entry, the “deferred asset,” in reality the Fed raises the money that corresponds to this deferred asset by issuing new Federal Reserve Notes, or borrowing from banks in the form of deposits, or borrowing from nonbanks through repurchase contracts, or letting assets mature and using the cash to pay expenses and dividends while not reducing the corresponding borrowings.
All of these actions increase the debt of the consolidated US government and are real costs to the taxpayers, even though consolidated federal budget accounting does not recognize these costs.
Federal Reserve Notes are explicitly guaranteed by the US government and must by law be collateralized by the Fed, but deposits in a district Federal Reserve bank are neither guaranteed nor collateralized, nor are they joint obligations of the other district banks. These deposits would legally be subject to losses without additional shareholder contributions and/or taxpayer support. The fact that Fed member banks maintain trillions in deposits at GAAP insolvent Federal Reserve district banks demonstrates that member banks believe that their deposits are fully protected by an implicit federal government guarantee, as indeed they are. Thus, the Federal Reserve’s negative capital position, which has been created over time by paying banks and other financial institutions more in interest and dividend payments than the Fed’s income, is in fact a taxpayer liability.
The Federal Reserve should not be permitted to make up its own accounting rules in order to hide its losses and negative capital. Taxpayers should demand that Congress require that the Fed produce financial statements that conform to generally accepted accounting standards, and that the notes to consolidated federal budget accounts report Fed operating losses and member bank dividend payments separately from Fed remittances to the Treasury. Such disclosures are necessary to promote public accountability and accounting probity for all parts of the government, which includes the Fed.
The current Federal Reserve accounting standard and federal budget disclosures hide taxpayer material financial risk created by the operations of the Federal Reserve, with its losses of $231 billion and negative capital of $185 billion. They also obscure the interests and potential liability of the private shareholders of the Federal Reserve district banks, which compete with taxpayers’ interests and should be accurately represented in the Fed’s reported capital accounts.
Who might object to our straightforward proposed changes in Fed and federal government accounting standards? Why the Fed, banks, financial institutions, and perhaps even some in Congress—who are unwilling to strengthen Fed oversight. Notwithstanding the almost certain political push-back, these changes are needed as the Federal Reserve is far too important to the US government and the country to continue using its current duplicitous accounting practices.
Paul H. Kupiec is a senior fellow at the
American Enterprise Institute.
Alex J. Pollock is a Senior Fellow at the
Mises Institute and author of Finance and Philosophy—Why We're Always Surprised and co-author of Surprised Again!.
https://lawliberty.org/duplicity-at-the-fed/
