/Pogled.info/ The problem is more acute for the US than the question of the US debt ceiling
For some reason, there is a widespread prejudice even among economists: they say that a central bank, by definition, cannot have losses. However, there are more and more cases where central banks have losses.
Eight years ago, in the article “Central Banks as Bankrupts of Last Resort”, I then noted that the US Federal Reserve skillfully disguised its losses, but that sooner or later it would become impossible to hide them, they would become public.
And at the border of 2022-2023, a number of publications appeared that drew attention to the fact that the Federal Reserve has obvious losses.
Here’s a Jan. 20 article by financial analyst Michael Gray: “Fed Update: Losses Continue to Rise.” The article notes that the Fed has been accumulating net operating losses on a weekly basis since September 21, 2022, when they raised the federal funds rate to 3.0-3.25%. Since then, the Fed has raised the federal funds rate twice by another 125 basis points, and weekly losses have widened. The Fed’s press release did not mention the phrase “operating losses” which is comprehensible to financiers, but introduces the term “deferred asset” (deferred asset) that aims to cover up the negative financial result of the Federal Reserve.
To quote the most important part of the article: What the press release didn’t say is that the deferred asset is an accounting trick that allows the Fed to hide its operating losses on its balance sheet as a negative liability. Nowhere in the report does it mention operating losses, but there are operating losses! For the first time in 107 years, the Fed posted an operating loss in the fourth quarter of 2022. Operating losses for the quarter were just over $15 billion.
The main reason for the loss and Michael Gray and other experts call the sharp increase in the prime rate. With this, the Fed got itself into a trap: there is an asymmetry in the Fed’s assets and liabilities. For 14 years, the Federal Reserve has been accumulating assets in the form of Treasury bonds and mortgage-backed securities. These were, first, very long documents; second, with fixed interest rates. At the beginning of last year, there were about $8.5 trillion of such securities on the Fed’s balance sheet, the average interest on these assets is 2%.
But the obligations of the American central bank remain traditionally short-term and with floating interest rates (at the beginning of last year, the amount of such obligations amounted to 5.7 trillion dollars). The U.S. Federal Reserve’s sharp hike in the key interest rate last year had little effect on the yield on the U.S. central bank’s assets, but it increased the value of its liabilities significantly. If interest payments on obligations in 2021 amounted to a rather symbolic amount of $5.7 billion, then in 2021 payments jumped to $102.6 billion. Due to this asymmetry, a negative net interest margin appeared in September.
Another embarrassment for the US Federal Reserve was that the “long” paper it bought earlier fell significantly in price. Consequently, the Fed has lost (and will continue to lose) some of the value of its assets. Michael Gray estimates that the market price of the Fed’s securities portfolio has fallen by $1.1 trillion at the end of 2022.
These losses are invisible as long as the securities are on the Fed’s balance sheet. The losses will only become apparent when the Fed starts selling them. Jerome Powell has already spoken about the mass selling of securities more than once, saying that this is the most important direction of “quantitative tightening” that has replaced “quantitative easing”.
So far, the negative financial result of the US Federal Reserve has been registered only in the fourth quarter. Due to the rather prosperous first two quarters, the overall annual result is not yet negative. Net profit for the year was $58.4 billion. However, on the back of 2021 earnings ($107.9 billion), profit was down 45.9%. And there will be a sequel: the negative net interest margin in 2023 will inevitably widen, guaranteeing Fed losses in late 2023.
As of Jan. 18, the deferred asset account had a cumulative balance of $24 billion, according to data from the U.S. Federal Reserve. These are the accumulated and hidden losses of the US central bank. Michael Gray notes: “The Fed is currently losing $2.2 billion a week. If rates don’t change, that means an annual loss of $114 billion. If the Fed continues to tighten as expected, the weekly losses will only increase . And further: “We forecast that the deferred asset account will grow to at least $240 billion over the next two years.”
Will the Federal Reserve be able to absorb the burden of “deferred assets,” or simply put, losses of this magnitude? Michael Gray believes that the camouflage of losses under the guise of accumulation of “deferred assets” it may not last a year or two. It is possible, albeit with great effort, to extend to 2030.
Over the past decade, the Fed has been funneling $50-80 billion a year of its profits into the budget. In 2023-2024, on the contrary, won’t the government have to transfer some of the budget funds to close the hole in the Federal Reserve? Or maybe the US central bank will plug this hole with the help of its capital? However, Michael Gray reminds: the total capital of the Fed is the ridiculous amount of 42 billion dollars. Projected losses for 2023 are nearly three times the Fed’s total capital.
Maybe the Fed will resort to the printing press? But then inflation, which the US central bank is fighting as a financial evil of last resort, will accelerate.
Wherever you throw, everywhere is a dead end. Or maybe the owners of the money (the main shareholders of the US Federal Reserve) have already planned the failure of the US central bank, writing off all its losses as hopeless and creating a new institution in its place? Which will issue an entirely new currency called the “digital dollar”?
Michael Gray considers another possible scenario. As U.S. lawmakers, governments, and citizens realize that the Fed has become a burden on taxpayers, there may be calls for a radical change in the status of the U.S. central bank: “As Congress begins to focus on the Fed losing money for the first time in 107 years, which will cost billions of taxpayer dollars, they can put pressure on the administration to take control and limit the Fed’s independence. The situation may escalate further, as discussions will heat up in the coming months to raise the ceiling on [публичния] debt.
Michael Gray says that as of early 2023, America’s biggest financial problem is the debt ceiling issue. Gray himself, however, thinks the problem of Federal Reserve losses is a higher priority: “Much of the stability of our financial system is due to its belief that the Central Bank is strong and in control. Continued weakness could erode that confidence. Again, this may become more meaningful than the teetering on the edge of raising the debt ceiling.
Translation: ES
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