Holding a mortgage investment portfolio
bigger than Fannie Mae’s or Freddie Mac’s, along with a massively
expanded government bond portfolio, puts the Federal Reserve into
uncharted waters of interest rate risk.
The combined balance sheet of the Federal Reserve has
$2.9 trillion in assets and $55 billion in equity, for leverage of a
heady 52 times and a capital ratio of a paltry 1.9 percent. On top of
this high leverage and little capital, the Fed runs massive interest
rate risk, with investments in long-term mortgage-backed securities
(MBS) of over $900 billion and longer-term Treasuries of $1.65 trillion.“The huge and rising government bond holdings of Japanese banks leave them vulnerable to a spike in interest rates, the International Monetary Fund has warned,” the Financial Times reported recently. But somehow the IMF did not warn about the Fed’s huge and rising bond holdings, which leave the Fed vulnerable.
Read more: http://www.american.com/archive/2012/november/does-interest-rate-risk-matter-if-youre-the-fed
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