5 ms·

This is a little alarmist. At least for the US, there don't seem to be any losses because the FED just lets the assets roll off. I.e., it does not sell the trea

This is a little alarmist. At least for the US, there don't seem to be any losses because the FED just lets the assets roll off. I.e., it does not sell the treasuries on its balance sheet, it lets them mature and gets paid the principle back by the government. If you do that and you have not purchased treasuries at negative yields (which the fed has not), and the government does not default (thankfully it hasn't) then you do not record losses. There is a scary graph in the article but this is just for mark to market gains/losses but the fed does not mark to market.

cm2187 4y ago
You can still lose money on the interest rate you pay to the massive reserves banks have to hold at the central bank when you jack up rates but hold fixed rate bonds. Also in theory, if they really do unwind QE (which I think they will never do), they also hold all sort of long term treasuries and ABS that they would have to sell on the open market, ie too long dated to hold to maturity. And my guess is that those are where most of the losses are (most sensitive to interest rate).
- deleted 4y ago
  [deleted]
- hristov 4y ago
  The FED does pay an interest rate on bank reserves, but the FED sets that rate themselves (this is the IORB rate). One hopes, with all the economists they have on staff, they would not set that rate to such a value that would lead them to insolvency. Regarding long term treasuries and ABS ... it will be much more convenient for the FED if the FED just held them to maturity, and this is probably what they would do. So I agree with you I very much doubt that they would unwind QE completely.
  - doubleunplussed 4y ago
    I would hope they set that rate to what they think is optimal for the economy, regardless of their solvency. I only skimmed the article, but I don't see where it gives reasons why solvency matters, although it hints it might. I was under the impression it doesn't really matter if the fed is solvent, since I can't think of any concrete consequences.
    - hydroreadsstuff 4y ago
      Afaik the needed difference in interest payment from the fed comes from the treasury. So it’s indirectly connected to the budget. In theory though you can still raise more debt to pay the interest. But I’m not sure about the longterm consequences of this. Having inflation above the interest rate helps decreasing the debt/gdp ratio.
      - doubleunplussed 4y ago
        Why can't they just pay the interest with newly-created money? I mean, that might not be how things are set up right now, and it would make their position even more negative since newly-created cash is a liability on their balance sheet and they didn't get an asset for it. So maybe at the moment it's on the treasury to make up the difference. But I don't see a fundamental reason why that needs to be the case, it seems incidental to the current setup. And yeah, even under the current system the treasury could sell bonds to fund the shortfall, and then the Fed could just buy those bonds (via the market) and keep them on their balance sheet, rolling over forever and so effectively loaning the money to the treasury at zero interest forever. So that's just the same thing but with extra steps.
        hydroreadsstuff 4y ago
        The system is set up to avoid such shenanigans. If desired, the question is will they find a way to work around the rules. I agree with you, but then the trust in the system would be greatly damaged. They might as well have two different interest rates / not pay IOR.
  - cm2187 4y ago
    On rates, I believe the rates track the monetary policy, they can't jack up interest rates to 5% and pay 0.5% on bank reserves. Not the least because that would create big holes in private banks p&l. On QE unwind, I think it is more a political pressure and damage control to the economy than convenience.
  - orwin 4y ago
    Insolvency to who? Who is the Fed final debt holder? (It sounds harsh but I'm genuinely interested in your response)
    - cm2187 4y ago
      The debt of the fed is the money it creates, typically through reserves (ie a commercial bank has a bank account at the central bank), and a little bit the paper money (which is an IOU from the Fed). But insolvency means the value of your equity is negative, ie your debt exceeds your assets. At this stage a private company would automatically be declared bankrupt, it’s not clear what would happen to the fed. Printing money won’t solve the solvency (you create as many assets as liabilities), but it’s not going to run out of cash either because it can print more.

cm2187 4y ago

You can still lose money on the interest rate you pay to the massive reserves banks have to hold at the central bank when you jack up rates but hold fixed rate bonds. Also in theory, if they really do unwind QE (which I think they will never do), they also hold all sort of long term treasuries and ABS that they would have to sell on the open market, ie too long dated to hold to maturity. And my guess is that those are where most of the losses are (most sensitive to interest rate).

deleted 4y ago
[deleted]
hristov 4y ago
The FED does pay an interest rate on bank reserves, but the FED sets that rate themselves (this is the IORB rate). One hopes, with all the economists they have on staff, they would not set that rate to such a value that would lead them to insolvency. Regarding long term treasuries and ABS ... it will be much more convenient for the FED if the FED just held them to maturity, and this is probably what they would do. So I agree with you I very much doubt that they would unwind QE completely.
- doubleunplussed 4y ago
  I would hope they set that rate to what they think is optimal for the economy, regardless of their solvency. I only skimmed the article, but I don't see where it gives reasons why solvency matters, although it hints it might. I was under the impression it doesn't really matter if the fed is solvent, since I can't think of any concrete consequences.
  - hydroreadsstuff 4y ago
    Afaik the needed difference in interest payment from the fed comes from the treasury. So it’s indirectly connected to the budget. In theory though you can still raise more debt to pay the interest. But I’m not sure about the longterm consequences of this. Having inflation above the interest rate helps decreasing the debt/gdp ratio.
    - doubleunplussed 4y ago
      Why can't they just pay the interest with newly-created money? I mean, that might not be how things are set up right now, and it would make their position even more negative since newly-created cash is a liability on their balance sheet and they didn't get an asset for it. So maybe at the moment it's on the treasury to make up the difference. But I don't see a fundamental reason why that needs to be the case, it seems incidental to the current setup. And yeah, even under the current system the treasury could sell bonds to fund the shortfall, and then the Fed could just buy those bonds (via the market) and keep them on their balance sheet, rolling over forever and so effectively loaning the money to the treasury at zero interest forever. So that's just the same thing but with extra steps.
      - hydroreadsstuff 4y ago
        The system is set up to avoid such shenanigans. If desired, the question is will they find a way to work around the rules. I agree with you, but then the trust in the system would be greatly damaged. They might as well have two different interest rates / not pay IOR.
- cm2187 4y ago
  On rates, I believe the rates track the monetary policy, they can't jack up interest rates to 5% and pay 0.5% on bank reserves. Not the least because that would create big holes in private banks p&l. On QE unwind, I think it is more a political pressure and damage control to the economy than convenience.
- orwin 4y ago
  Insolvency to who? Who is the Fed final debt holder? (It sounds harsh but I'm genuinely interested in your response)
  - cm2187 4y ago
    The debt of the fed is the money it creates, typically through reserves (ie a commercial bank has a bank account at the central bank), and a little bit the paper money (which is an IOU from the Fed). But insolvency means the value of your equity is negative, ie your debt exceeds your assets. At this stage a private company would automatically be declared bankrupt, it’s not clear what would happen to the fed. Printing money won’t solve the solvency (you create as many assets as liabilities), but it’s not going to run out of cash either because it can print more.