Recently, the Federal Reserve has been mired in a series of serious difficulties, facing huge losses and pressure to lay off employees. Judging by the latest data, the Fed's losses amounted to $120.4 billion, and this loss was made through a name on the balance sheet called"Deferred assets"of fictitious accounts to embody. In reality, the Fed will not really go bankrupt, because it will deduct this loss from future profits, however, the profits in this case do not exist, which is as ridiculous as the emperor's new clothes. In addition, doubts about the Fed are growing, with analysts saying it could take four years for the Fed to make up for the loss, meaning that the profits earned by the Fed over the next four years can only be used to cover current losses. It can be said that the Fed faces a triple challenge: loss pressure, cash flow crisis, and cost control crisis. In order to survive, the Fed has had to take measures such as layoffs to reduce spending.
However, the Fed will need to find a way to raise money if it is to keep it running. In the current situation, the Fed has three solutions. First, they can continue to shrink their balance sheets, i.e., sell their assets at a loss in exchange for cash. Second, they can borrow money from the U.S. Treasury, which still has some money to lend to the Fed despite the severe debt crisis. Finally, they can ask shareholders to increase their capital and borrow from more than 3,000 shareholder banks. However, all three options have certain difficulties and risks. On the whole, although the Fed will not go bankrupt directly, under the threat of bankruptcy, they have to tear down the east wall and make up for the west, and try their best to maintain the operation.
In addition to the dilemma facing the Fed, this issue has also raised concerns about the US economy. In fact, the Fed's crisis has revealed the actual recession and risks in the US economy. Over the past few years, the Fed's performance has been seen as stable"Money-making machine", which handed over a lot of profits to ** and became the pride of the United States. In recent years, however, the Fed's approach has gradually exposed its own problems and crises.
First, the Fed's 11 consecutive interest rate hikes have caused huge distress to the global economy. They thought it would only have an impact on other countries, but they found themselves hit hard as well. Second, in order to reduce losses, the Fed has drastically reduced its balance sheet and sold its bonds at a low price. In the context of the US dollar's interest rate hike, these bonds have become garbage, not only floating losses in hand, but also selling at a loss. Just as Silicon Valley Bank went bankrupt by selling a large number of bonds at a loss after a run, the Federal Reserve faces similar risks and pressures.
It is worth noting that the Fed, as the largest holder of bonds, holds bonds that are essentially an asset, but in the face of rising interest rates in the dollar, these bonds have become extinct in name. They had to rush to sell these bonds in order to reduce the scale of the risk. As a result, some experts believe that the Fed raises interest rates to prevent inflation, while shrinking its balance sheet to prevent bankruptcy. However, this also raises another question: If those banks can fail, wouldn't the Fed fail faster?
According to the balance sheet released by the Federal Reserve, data for April this year showed that their operating losses reached $44 billion, while their capital was only $42 billion, and they were in fact in a state of substantial bankruptcy. This was almost unimaginable in the past, as the Fed has handed over nearly $1 trillion in profits over the past decade, compared to $76 billion in 2022 and $109 billion in 2021. Today, however, the huge losses are indeed worrying, and they reveal the true face of the US economy.
Finally, although the Fed does not have the authority to print money directly, there are other ways to raise it. For example, they can continue to shrink their balance sheet and sell their assets at a low price for cash;They can also borrow money from the U.S. Treasury and use the money from the Treasury to cover their own lossesIn addition, they can also request shareholders to increase their capital and borrow money from shareholders' banks. However, there are certain challenges and risks associated with these options, so the Fed needs to find a solution as soon as possible to stay afloat under the pressure of losses.
To sum up, the Fed is facing a huge dilemma, and although they claim that they will not go bankrupt, they are actually under pressure from losses, cash flow, and cost control. This question also exposes the true face of the US economy and tears its façade apart. Therefore, we need to recognize the magnitude of the problem and seek solutions to revive the economy.