The Fed Puts the Hurt on Uncle Sam

Oct 11, 2022 | Finconomics 101, No Bull Economics


As we discussed in a previous post, the Fed’s ginormous $9 trillion bond portfolio generated $107.8 billion in net interest income for the federal government in 2021. This went a long way to subsidize the federal government’s $515 billion interest expense paid out in 2021.

Now that the Fed has hiked interest rates so aggressively, the interest it must pay on its $3 trillion in bank reserves is more than offsetting the interest it collects on its bond portfolio such that it is currently generating an operating loss of $2.9 billion.

While the press is saying that this is not a big deal because the Fed is not at risk of going bankrupt (it will just print more money to cover these losses), what they are not talking about is the impact on the federal government which is no longer being subsidized by the Fed ($107.8B in 2021) while its borrowing costs are dramatically rising because of The Fed’s interest rate hikes. How will the federal government pay for an extra couple of hundred $ billion in borrowing costs? Hopefully, the Fed will reconsider its rate hikes (which are incapable of curtailing supply-driven inflation) by taking pity on the federal government which is starting to share in the pain of indebted Americans everywhere.  

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