According to analysts at Morgan Stanley, the Federal Reserve is close to ending a series of financial losses, potentially leading to a return to profitability and the ability to provide cash to the Treasury in the future. The central issue is the connection between the Fed's revenue generation for operational purposes and the payments it makes to manage short-term interest rates. Recent rate hikes had put the Fed incurring substantial losses, but with current lower rates, the Fed is nearing a point where it can start making money again.

Morgan Stanley highlights a critical "breakeven rate" where the Fed's income matches its expenses, calculated based on the interest earned from the bonds it holds relative to its interest liabilities. The bank points out that the Fed is close to breaking even due to the reduced balance sheet and lower policy rates.

As the Fed continues to reduce its bond holdings and potentially lowers rates further, it is likely to return to profitability. The recent financial report released by the Fed in 2024 showed a smaller loss compared to the record losses reported in 2023, indicating progress toward financial stability. While the recent losses do not impact the Fed's ability to conduct monetary policy, the institution is aiming to restore profitability by adjusting its interest rates and bond holdings.