Global Analysis from the European Perspective. Preparing for the world of tomorrow

FED is not playing fair – can it go bankrupt?

The most important central bank in the world, the US Federal Reserve (FED), recently presented its financial report, which shows that it had a substantial loss of USD 114 billion last year. Why such a large loss for the FED? To explain this, one should first distinguish between two aspects of the central bank’s activities.

Firstly, the FED holds large quantities of US bonds, which in turn yield interest. Of course, in this case, this interest is income for the central bank. It is worth noting that since the FED began buying bonds on a large scale in 2008, interest rates have also risen considerably
Secondly, the Federal Reserve allows commercial banks and various types of funds to hold money in an account at the central bank. At the same time, it pays a certain amount of interest on these funds, which depends primarily on the level of interest rates.

Well, between 2022 and 2023, there was a series of interest rate hikes in the US. Eventually, a level of 5.5% was reached. This meant that the FED had to pay 5.5% interest to banks and funds (and there were a lot of them) that wanted to keep their money in a central bank account.

So on the one hand, the Fed still held a similar amount of bonds in 2023, for which it received interest rates close to the 2022 level (i.e. much lower than this 5.5%). On the other hand, it had to pay much higher interest rates to commercial banks or money market funds. This resulted in the loss.

You may ask: What happens when a central bank suffers a loss? From a purely financial point of view: Nothing significant happens. It is assumed that this loss will be covered by future profits. In the context of a central bank, it is difficult to talk about bankruptcy, especially as central banks can create gigantic amounts of money under the current system.
Gefira is critical of the monetary policy of central banks, but for completely different reasons. No one from the central bankers is commenting on the following questions:

1) Is it fair that the central bank only rescued and wants to rescue selected financial institutions simply because they operate on a large scale?

2) Is it normal for these institutions (especially banks) to hold their reserves at the central bank and safely receive a few percent interest in return?

3) What’s more – is it fair that unprofitable companies are kept alive by the central bank printing money, which in turn makes it more difficult for new companies to enter the market?

4) Is it good for the economy that unprofitable zombie companies are kept afloat in this way, which otherwise – in the real free economy – should have gone bankrupt long ago?

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