(MENAFN- Trend News Agency)
The U.S. Federal Reserve is carrying $330 billion in unrealized
losses on its holdings of U.S. Treasury and mortgage-backed
securities as of the end of March, according to newly released
financial statements showing the impact of rising interest rates on
the market value of the Fed's balance sheet, Trend reports with reference
to Reuters .
The central bank's holdings of nearly $9 trillion in assets
still allowed the Fed to remit $32.2 billion to the U.S. Treasury
in the first quarter of 2022, according to the documents.
But the losses on the Fed's investments, an $8.5 trillion
portfolio that surged higher through asset purchases designed to
keep financial markets stable through the pandemic, pose a
potentially tough political problem for the central bank.
Bill Nelson, chief economist at the Bank Policy Institute, said
that adjusting for the appreciation in its assets the Fed had seen
through the end of last year, the unrealized losses were an even
larger $458 billion.
Criticized for continuing to buy assets even as the economy was
well on the way to healing from the pandemic, it is now trying to
reverse course and shrink its holdings, particularly of mortgage
backed securities.
If it chooses to speed the process by selling some of those
assets, the unrealized 'paper' losses would have to be booked as a
tangible hit.
According to the Fed's first quarter financial statement, the
Fed's $2.77 trillion in MBS purchases has declined on a fair market
value basis by $164 billion, and as of March 31 was worth $2.606
trillion.
Mortgage rates are even higher now, and as with any
interest-bearing security as market interest rates have risen those
losses have deepened.
A New York Fed report earlier this week flagged potentially
large losses to the Fed's portfolio, given that interest rates are
expected to continue rising.
The report also flagged a further issue: As the Fed raises its
short term interest rate, it will do so by offering larger payments
to banks for the reserves they deposit at the Fed, increasing the
central bank's expenses. As its balance sheet shrinks, meanwhile,
its interest earnings will decline, potentially pushing the Fed
towards operating losses.
New York Fed officials in the report said the Fed would be able
to fund its operations and conduct monetary regardless.
But it could mean sharp declines in a key metric watched closely
by elected official: the profits that the central bank remits to
the U.S. Treasury.
Those have climbed during the era of 'quantitative easing' and
hit a record $107 billion last year, but could fall to zero as Fed
monetary policy shifts.
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