A Run on the Fed?

Mar 29, 2023 | Finconomics 101, No Bull Economics

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The Fed has crushed its own bond portfolio by hiking interest rates. Maybe there will not be a run on the Fed, but perhaps we should be more concerned about a run on the US$.

Commentary

Fed rate hikes stressed the banking system by driving down the face value of bond portfolios held by depository institutions as we previously discussed. However, what is not widely discussed is the impact of the Fed’s rate hikes on its own $7.5 trillion bond portfolio. As evident below, the Fed incurred a $1.1 trillion unrealized loss (-13%) on its bond portfolio at the end of 3Q22. We must assume this unrealized loss has increased since 9/30/22, given subsequent Fed rate hikes. 

Fed Losses Chart
Fed Losses Chart

While no one is talking about a bank run on the Fed, there has been a fair amount of press about a global run on the US$ which could be far worse. This reflects a growing consensus that the Fed should not have an $8 trillion bond portfolio in the first place because this means that our central bank created $8 trillion in new US$ currency to pay for it. This level of excess has sparked much international criticism, including China who quote the Nixon administration’s infamous quip that “the dollar is our currency, but your problem”.

It’s past time for the Fed & the Federal Government to put our financial house in order. Here’s a pro tip, the answer is definitely not to raise taxes, but rather to decrease government spending & money printing!

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