U.S. central bank loses billions to rate hikes, “losses pile up in an IOU”

The Fed’s actions have fueled criticism of the U.S. central bank, with some strategists saying the onslaught of interest rate hikes could cause a liquidity crunch in the world’s largest bond market. In addition, a report released Tuesday explained that the Fed and central banks around the world “are losing billions” by paying more interest.

The Fed is losing billions

The U.S. Federal Reserve has raised the federal funds rate (FFR) several times this year, and three times in a row the central bank has increased the rate by 75 basis points (bps). These rate hikes have caused politicians and investment bank Barclays to worry about the need for the central bank to slow down rate hikes. Even the United Nations Conference on Trade and Development (UNCTAD) has stepped in and urged the Fed to slow down and increase government spending.

Despite these calls, observers who work closely with Fed members and the markets suspect that another 75 basis point rate hike is guaranteed next month. On Tuesday, Bloomberg reported that at present, the U.S. central bank “is losing billions“. Bloomberg contributor Jonnelle Marte states that “without Fed revenues, the Treasury must then sell more debt to the public to fund government spending.“Despite the need to sell more debt, Morgan Stanley economist and former U.S. Treasury official Seth Carpenter insists that losses have no material effect on short-term monetary decisions.

Carpenter also pointed out:

Losses do not significantly affect their ability to conduct monetary policy in the short run.

According to one reporter, “other central banks are also facing losses from rising rates“

NEW: The Fed’s rate hikes are costing it billions.

Higher rates mean the central bank is now paying more interest on reserves than it collects from its portfolio. This shouldn’t affect monetary policy, but it could cause some political headaches:https://t.co/yeCMBCadFT

– Jonnelle Marte (@Jonnelle) October 25, 2022

Bloomberg reporter Jonnelle Marte tweeted that the “higher rates mean that the central bank now pays more interest on reserves than it collects from its portfolio“. Jonnelle Marte added that this situation could lead to “some political headaches.” “I’m not going to break out the accounting jargon, but the short version is that the Fed used to send its revenues to the Treasury” she added. “Now that the Fed is losing money, the losses are accumulating into an IOU that the Fed will pay for later with future revenues.“

Other central banks are also dealing with losses as rates go up around the world to combat inflation. The accounting losses threaten to fuel criticism of the asset purchase programs undertaken to rescue markets and economies.
w/ @endacurran & @jrandow https://t.co/yeCMBCadFT

– Jonnelle Marte (@Jonnelle) October 25, 2022

Bloomberg reporter added:

Other central banks are also facing losses as rates rise around the world to fight inflation. Accounting losses threaten to fuel criticism of asset purchase programs undertaken to save markets and economies.

The article, which notes that the Fed is losing billions and wreaking havoc on other central banks around the world, follows a number of analysts who insist that the Fed is caught in a trap because too much of a rise in the FFR could lead to “blow up the Treasury“. The founder of the hedge fund Praetorian CapitalHarris Kupperman, said this could happen in a blog post published on October 18. J. Kim of skwealthacademy substack also predicted that a “flash crash of the U.S. Treasury bond market is inevitable under these market conditions“.

Experts interviewed by Jonnelle Marte, however, explained that the U.S. central bank’s losses can be recapitalized. Jerome Haegeli, an economist xhez Swiss Re, told Bloomberg’s reporter that despite the fact that it can always be recapitalized, central banks will face political criticism over their policymaking.

“The problem with central bank losses is not the losses themselves – they can always be recapitalized – but the political backlash that central banks are likely to face more and more“, said Jerome Haegeli in a statement to the reporter.