Fed Is Losing Billions, Wiping Out Profits That Funded Spending

(Bloomberg) — Profits and losses aren’t usually thought of as a consideration for central banks, but rapidly mounting red ink at the Federal Reserve and many peers risks becoming more than just an accounting oddity.

The bond market is enduring its worst selloff in a generation, triggered by high inflation and the aggressive interest-rate hikes that central banks are implementing. Falling bond prices, in turn, mean paper losses on the massive holdings that the Fed and others accumulated during their rescue efforts in recent years.

Rate hikes also involve central banks paying out more interest on the reserves that commercial banks park with them. That’s tipped the Fed into operating losses, creating a hole that may ultimately require the Treasury Department to fill via debt sales. The UK Treasury is already preparing to make up a loss at the Bank of England.

Britain’s move highlights a dramatic shift in countries including the US, where central banks are no longer significant contributors to government revenues. The US Treasury will see a “stunning swing,” going from receiving about $100 billion last year from the Fed to a potential annual loss rate of $80 billion by year-end, according to Amherst Pierpont Securities LLC.

The accounting losses threaten to fuel criticism of the asset purchase programs undertaken to rescue markets and economies, most recently when Covid-19 shuttered large swathes of the global economy in 2020. Coinciding with the current outbreak in inflation, that could spur calls to rein in monetary policy makers’ independence, or limit what steps they can take in the next crisis.

“The problem with central bank losses are not the losses per se — they can always be recapitalized — but the political backlash central banks are likely to increasingly face,” said Jerome Haegeli, chief economist at Swiss Re, who previously worked at Switzerland’s central bank.

The following figures illustrate the scope of operating losses or mark-to-market balance-sheet losses now materializing:

  • Fed remittances owed to the US Treasury reached a negative $5.3 billion as of Oct. 19 — a sharp contrast with the positive figures seen as recently as the end of August. A negative number amounts to an IOU that would be repaid via any future income.
  • The Reserve Bank of Australia posted an accounting loss of A$36.7 billion ($23 billion) for the 12 months through June, leaving it with a A$12.4 billion negative-equity position.
  • Dutch central bank Governor Klaas Knot, warned last month he expects cumulative losses of about 9 billion euro ($8.8 billion) for the coming years.
  • The Swiss National Bank reported a loss of 95.2 billion francs ($95 billion) for the first six months of the year as the value of its foreign-exchange holdings slumped — the worst first-half performance since it was established in 1907.

While for a developing country, losses at the central bank can undermine confidence and contribute to a general exodus of capital, that sort of credibility challenge isn’t likely for a rich nation.

As Seth Carpenter, chief global economist for Morgan Stanley and a former US Treasury official put it: “The losses don’t have a material effect on their ability to conduct monetary policy in the near term.”

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By Published On: October 25, 2022Categories: EconomicsComments Off on Fed Is Losing Billions, Wiping Out Profits That Funded Spending

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Patriotman currently ekes out a survivalist lifestyle in a suburban northeastern state as best as he can. He has varied experience in political science, public policy, biological sciences, and higher education. Proudly Catholic and an Eagle Scout, he has no military experience and thus offers a relatable perspective for the average suburban prepper who is preparing for troubled times on the horizon with less than ideal teams and in less than ideal locations. Brushbeater Store Page: http://bit.ly/BrushbeaterStore

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