Why the Fed Losing Money Might Actually Matter for Monetary Policy
Yet another thing for the central bank to think about.
The seal of the U.S. Federal Reserve Board of Governors across the street from the Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S.
Photographer: Samuel Corum/BloombergThe Fed isn’t like other banks. It can’t go bankrupt. It cannot experience a run in the usual sense. Normal accounting rules don’t apply.
Just like the meme suggests, the Federal Reserve’s relationship with a powerful printing press means the central bank will never really run out of money.
But despite the uniqueness of its position, the central bank can still record an operating losses — and that’s a possibility that some commentators are beginning to bring up as the Fed prepares to hike interest rates for the first time in years and soon after starts to shrink its balance sheet in a process known as quantitative tightening (QT).
Higher interest rates could mean losses on the Fed’s portfolio of bonds that it began snapping up in the aftermath of the 2008 financial crisis, with the optics of ‘losing money’ adding an extra layer of complexity for a central bank attempting to respond to higher inflation without sparking or exacerbating a looming recession.
Analysts at JPMorgan Chase & Co. estimated earlier this year that the Fed could post a net loss if overnight interest rates were to rise to around 2.25%. While that “shouldn’t create operational problems,” it could “be a little embarrassing, Congressional testimonies would be even more painful, and the reputational costs could be notable,” the report said.