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IPFS News Link • Federal Reserve

The Fed is bankrupt, but it's unrealised


The Fed has spent trillions of dollars buying government and mortgage bonds as part of its Quantitative Easing programmes to prop up the economy. In 2022, yields have risen as the Fed has tightened monetary policy to combat sky-high inflation. When yields rise, bonds lose value. The Fed now has unrealised losses on its bond holdings of more than $1 trillion, far exceeding its capital. The Fed would be in trouble if it were a normal bank. But it is not, so what are the consequences? This is the first part of a small two-part analysis. In this part I describe Fed's unrealised losses. In the second part, I will describe Fed's realised losses.In recent months, Silicon Valley Bank, First Republic, and other large US banks have gone bankrupt or been taken over in forced mergers. The banks suffered large losses on their bond holdings as interest rates rose during 2022. Higher interest rates mean falling bond prices. This may not be a problem if you can hold your bond to maturity, because you there get the face value of the bond, but if you have to sell your bond before maturity – perhaps because depositors pull out their money – you realise the losses. Academic research, which I cite in my recent blog post (link), estimates that the US banking system has $2 trillion in such unrecognised losses, equivalent to the total equity of US banks.

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