As one of the world's largest central banks, the Federal Reserve has always played an important role in determining monetary policy in the United States and globally. Recently, however, the Fed has been bogged down in huge losses. According to reports, as of November 22, the Fed's losses have reached $120.4 billion, equivalent to 860 billion yuan. This has raised concerns about whether the Fed will go bankrupt. This article will explain the reasons for the Fed's losses and whether it will fall into bankruptcy.
The Fed's losses can be divided into two scenarios: actual losses and floating losses. Actual loss refers to income less than expenditure, while floating loss refers to loss due to the value of assets held**. The Fed's primary income** is interest income on its holdings of U.S. Treasuries and mortgage bonds (MBS). However, interest rate hikes in the United States in recent years have led to an increase in financing costs, and interest expenses incurred by commercial banks in reserves deposited with the Federal Reserve have also increased significantly. As a result, the Fed received relatively little interest income, while interest expenses continued to increase, resulting in cash inflows being smaller than cash outflows, resulting in actual losses.
However, the main reason for the Fed's huge losses is floating losses. The Federal Reserve holds large amounts of U.S. Treasuries and MBS, and the value of these assets changes in response to market volatility. In recent years, the U.S. interest rate hike policy has led to an increase in U.S. Treasury yields, which has led to a decline in Treasury bonds. If the Fed buys a large amount of Treasury bonds when the Treasury is high, then it will incur a floating loss at the time of ***. This situation is similar to an investment, which only turns into an actual loss when you sell it. Therefore, this part of the loss will not be a fatal blow to the Fed's operations.
Although the Fed is facing huge losses, it does not mean that it will go bankrupt. First, floating losses are not fatal to the Fed. Unlike commercial banks, the Fed does not face the risk of a run on deposits, so even a large loss will not result in an actual loss of money.
Second, interest expenses will gradually decrease as interest rate hikes come to an end. At present, the Fed has begun to pause its interest rate hikes and expects to even start cutting them in the future. This will ease the pressure on the Fed's interest expenses and the actual loss will gradually reduce. In the long run, the Fed can actually be profitable. In fact, over the past decade, the Fed has handed over nearly $1 trillion in profits to the United States**.
The most important point is that the Federal Reserve, as the issuer of the dollar, has the power to issue money. Although the Fed does not have the right to "print money" at will, it can obtain a steady stream of dollars through its holdings of US Treasury bonds and MBS. Even if the Fed runs out of assets, the United States** will not let it happen to it. Because the Federal Reserve, the dollar, and the United States are inextricably linked, any failure in any one link will have catastrophic consequences for the US economy.
In summary, the Fed is not going bankrupt despite the fact that it is currently facing huge losses. Although there are actual losses and floating losses, floating losses do not lead to actual capital losses, and actual losses can be wiped out by adjusting interest rate hikes and reducing interest expenses. In addition, as the issuer of the US dollar, the Fed has the power to issue money and can access funds through ** assets. Therefore, we should not worry about the possibility of the Fed going bankrupt.