Fed: US Fed Carrying $330 Billion in Unrealized Asset Losses: First Quarter Financial Statements

The U.S. Federal Reserve was recording $330 billion in unrealized losses on its holdings of U.S. Treasuries and mortgage-backed securities at the end of March, according to recently released financial statements showing the impact of the rise. interest rates on the market value of the Fed balance. sheet.

The central bank’s holdings of nearly $9 trillion in assets still allowed the Fed to return $32.2 billion to the U.S. Treasury in the first quarter of 2022, the documents show.

But losses on the Fed’s investments, an $8.5 trillion portfolio that grew through asset purchases intended to keep financial markets stable during the pandemic, pose a potentially difficult policy issue for the central bank. .

Bill Nelson, chief economist at the Bank Policy Institute, said that taking into account the appreciation in its assets that the Fed saw at the end of last year, unrealized losses amounted to $458 billion. dollars even more.

Criticized for continuing to buy assets even as the economy recovered from the pandemic, he is now trying to reverse course and reduce his holdings, particularly of mortgage-backed securities.

If he chooses to speed up the process by selling some of those assets, the unrealized “on paper” losses should be counted as a tangible hit.

According to the Fed’s first quarter financial statements, the Fed’s purchases of $2.77 trillion in MBS decreased by $164 billion on a fair market value basis and, as of March 31, was worth $2.606 trillion. dollars.

Mortgage rates are even higher now and, as with any interest-bearing security, as market interest rates have risen, these losses have deepened.

A report from the New York Fed earlier this week signaled potentially large losses for the Fed’s portfolio as interest rates are expected to continue to rise.

The report also pointed to another problem: as the Fed raises its short-term interest rate, it will do so by offering larger payments to banks for the reserves they deposit with the Fed, thus increasing the central bank spending. As its balance sheet shrinks, its interest income will decline, potentially pushing the Fed toward operating losses.

New York Fed officials said in the report that the Fed would be able to fund its operations and conduct monetary operations regardless.

But that could mean steep declines in a key indicator watched closely by elected officials: the profits that the central bank hands over to the US Treasury.

These soared in the era of “quantitative easing” and reached a record $107 billion last year, but could fall to zero as Fed monetary policy changes.