Douglas Rissing
“As discussed in the first note of this two-note series, net income of the Federal Reserve (Fed) and its remittances to the U.S. Treasury along with the unrealized gain or loss position of the System Open Market Account (SOMA) portfolio are affected by fluctuations in interest rates. The need for the Fed to increase the policy rate expeditiously to address inflationary pressures is projected to result in the Fed’s net income turning negative temporarily. The associated increase in market interest rates has also led to an unrealized loss position of the SOMA portfolio, which could become larger in the near-term.”
– Board of Governors of the Federal Reserve System
Truer words were never spoken. As America stares hard at all of the political shenanigans in Washington, D.C., there is a big mess taking place behind the scenes. This financial drama, the issues with the Fed, will hit us in two ways. It will affect what the Congress is able to do with the debt ceiling, and any implementation of a debt ceiling may have a drastic impact upon the financial condition of the Fed.
The Fed recently announced that it sent $76 billion in profits to the U.S. Treasury last year. I point out that these profits dwindled away in September, however, and then the Fed turned the corner into a loss position. In fact, this loss totaled $18.8 billion by the end of 2022, which has continued to grow ever since. In 2022, the Fed says that interest expenses, money paid out, surged to $102.4 billion last year from 2021’s $5.7 billion.
Don’t be a luddy-duddy! Don’t be a mooncalf! Don’t be a jabbernowl! You’re not those, are you?
– W.C. Fields in “The Bank Dick”
“The Fed’s income and remittances to the Treasury have been elevated over the last two years as a result of the Fed’s securities purchases in response to the COVID-19 pandemic. However, given the recent and expected rise in interest rates, remittances are projected to fall to zero for a time and a deferred asset, which represents the amount of future net income that will need to be realized before remittances to the Treasury resume, will be recorded on the Fed’s balance sheet.”
– Board of Governors of the Federal Reserve System
As all of this flies under the radar, as the Fed itself has admitted that “under the baseline projection, the unrealized loss position is projected to reach a maximum of about $670 billion, or about 8 percent of the portfolio’s par value, by the end of 2022.” They went on to state that, “as indicated by the lower edge of the 90-percent confidence band which represents a tail risk event, unrealized losses peak at around $1.1 trillion, or about 16 percent of the portfolio’s par value, in 2023.”
I point all of this out today because I believe the United States is actually facing two separate, but related, crises. The first once is spoken about widely: the debt ceiling problem. The second one is that instead of the Fed handing the Treasury money, the Treasury may have to hand the Fed money to meet its reserve obligations. According to the Fed, they are now paying some $650 million in interest each and every day to both foreign and domestic banks.
My, how the tide has turned!
“We’re making motion picture history here.”
– W.C. Fields in “The Bank Dick”
Original Source: Author
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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