Wednesday, February 1, 2023

The Fed Goes Underwater

Since the financial crisis, the Federal Reserve has lost over $700 billion

  • The Fed's losses owe to a shift in the way it does business
  • Before the 2008 financial meltdown, the central bank tried to control interest rates by buying and selling U.S. bonds
  • Since the crisis, it has used a different playbook
  • It provides enough funds to satiate the entire banking world, and it seeks to adjust the economy by paying banks more or less interest to hold those funds
  • When it first undertook this "floor" experiment, the Fed's balance sheet exploded to more than $4 trillion
  • A larger balance sheet means greater risks, so the Fed has added to that risk by purchasing longer-duration assets
  • Hundreds of billions of losses on Treasuries, mortgages, and other programs have swamped its meager $40 billion in capital
  • Fed is not just losing value on its old assets; it has started paying out more money than it takes in

https://www.city-journal.org/fed-goes-underwater 

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