A recent study shows that it will take about four years for the Fed to fully cover its operating losses and hand over profits to the U.S. Treasury. As the Fed continued to raise interest rates while reducing the size of its balance sheet, it began to lose money in September 2022.
Research by the St. Louis Fed estimates that it will take about four years for the Fed to fully cover its operating losses. As of November 22 this year, the Fed's "deferred assets" used to measure net negative returns reached $120.4 billion. This means that the Fed will need to work hard to close this hole over the next few years. At the same time, according to market reports, the Fed's book loss on U.S. Treasury bonds has exceeded 1$3 trillion. This large loss makes $120.4 billion just the tip of the iceberg, and the market widely believes that this figure may increase further. The Federal Reserve holds about 18% of U.S. Treasuries, while other individuals and institutional investors hold more than 52% of U.S. Treasuries. Individual and institutional investors have already suffered heavy losses due to U.S. Treasuries**.
In addition, at the recent Fed interest rate meeting, the Fed's monetary policy stance has shifted significantly, sending a clear signal of interest rate cuts. Many Feds will cut interest rates three times next year. The market generally believes that the reason for the Fed's change in monetary policy is not only because of the decline in inflation, but also because of political factors and economic risk factors. With Biden's approval rating in the U.S. polling hit a record low, with more than four-thirds of respondents saying their incomes are not keeping up with price increases, and 62% complaining about the poor state of the U.S. economy, this could affect the Fed's decision-making.
Another reason why the Fed needs to cut interest rates urgently is to reduce economic risks. The Bank of Japan made it clear in its Financial System Report that the risks of commercial real estate in the United States are enormous. In the past 10 years, the U.S. commercial real estate has been 50% of the world, and the market size now accounts for 90% of the U.S. GDP. If there is a thunderstorm in the U.S. commercial real estate market, it will have a serious impact on U.S. economic growth and banking risks. In addition, the bankruptcy filing of global co-working giant WeWork has made matters worse, further damaging the already dangerous commercial real estate market.
On the other hand, the Fed's continued interest rate hikes have led to a sharp rise in US Treasury yields, which in turn has led to US Treasury bonds**, and individual and institutional investors have suffered huge losses. In addition, negative factors such as high interest rates and the credit crunch have also had an impact on the commercial real estate market. Given the huge paper losses of US Treasury holders and the increase in interest costs on US Treasury bonds, the Fed needs to cut interest rates to drive down US Treasury yields, reduce losses for Treasury holders, and reduce the US fiscal deficit.
According to a number of institutions, there will be more room for future interest rate cuts in the United States than the Fed expects. Goldman Sachs believes that the Fed will start cutting interest rates in March next year, and the pace is likely to be more rapid. ING **, with the US economy cooling significantly, the Fed will cut interest rates six times by 2024. Deutsche Bank is more aggressive**, and the Fed is likely to cut interest rates seven times next year.
The Fed's operating losses and economic risks have forced it to consider a faster pace of rate cuts. Risks in the commercial real estate market and rising US Treasury yields have left the Fed facing large losses and high interest costs, and action must be taken to alleviate these pressures. The market generally ** that the US will cut interest rates more than the Fed expects in the future, which shows the important impact of the current economic situation and political environment on the Fed's decision-making. Faced with this situation, the Fed needs to stabilize market sentiment and adopt appropriate monetary policy to promote sustainable growth in the U.S. economy.