New York Fed Flags Scenarios Where Central Bank Could See Losses

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The Fed may have seen paper losses on its bondholdings earlier this year

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came to a conclusion report details activities Around the Fed’s huge balance sheet in 2021. The Fed’s cash and bond holdings now stand at $9 trillion, but are set to shrink in June as the central bank begins the process of allowing some Treasury and mortgage bonds to mature. and not changed.

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The Fed has started the process of raising interest rates to reduce inflation. Its benchmark federal-funds rate target is now between 0.75% and 1%, and the central bank is on track for further rate hikes as the year progresses.

Rising rates mean that the Fed, which pays banks, money funds and others to park cash at the central bank, will face higher costs to achieve its monetary policy goals. The Fed funds itself from income earned from bonds and services it owns.

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Last year, after covering expenses, Fed handed back about $107 billion As for the Treasury, the central bank said at the beginning of the year. As it raises rates, it faces higher expenses, and depending on how far short-term rates go, those costs can eat up all of the Fed’s earnings so that it doesn’t give any money to the government. could not give back

In the report, the New York Fed said that market participants in surveys conducted in March projected a fed-funds rate of 2.625% by the end of 2024, with the rate falling to a longer-term 2.25%.

If interest rates are one percent higher than that expected path, “net portfolio income is short-term negative because of the higher cost of funds interest paid on reserves.
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” It added, “If interest rates rise 200 basis points more than indicated in the March surveys, net portfolio income will be negative for about two to three years.”

“In higher interest rate scenarios, net income projections could result in termination of remittances to the US Treasury,” the bank said. Under such a scenario, the Fed would turn to an accounting tool called a deferred asset, which would allow it to operate under a deficit, the bank said, “as net income gradually rises above zero, The deferred asset is reduced, and remittances resume. Once the deferred asset is exhausted.”

Write At [email protected] Michael S. derby

Credit: www.Businesshala.com /

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