The U.S. Federal Reserve announced on September 14 that it had accumulated losses of $100 billion in 2023. This situation is expected to worsen for the Fed, according to Reuters. However, for assets like Bitcoin (BTC), this could actually be a hidden benefit.
The Fed’s financial setback
The primary reason behind this loss is that the interest payments on the Fed’s debt have exceeded the earnings generated from its holdings and services provided to the financial sector.
As a result, investors are trying to understand how this will affect interest rates and the demand for assets like BTC.
Some analysts believe that the Fed’s losses, which began a year ago, could potentially double by 2024. The central bank categorizes these negative results as “deferred assets” and argues that there is no immediate need to cover them.
The Fed’s revenue for the U.S. Treasury
In the past, the Federal Reserve has been profitable. However, the lack of profits does not prevent the central bank from conducting monetary policy and achieving its objectives.
The Fed’s balance sheet has incurred losses due to significant interest rate hikes, which have increased from near-zero in March 2022 to the current level of 5.25%. Even if interest rates stay the same, Reuters suggests that the Fed’s losses are likely to persist for some time. This is due to the expansionary measures taken in 2020 and 2021 when the central bank aggressively purchased bonds to prevent a recession.
In essence, the Fed functions like a regular bank, providing returns to depositors, which are primarily banks, money managers, and financial institutions.
An article in Barron’s illustrates the impact of the $100 billion loss, stating:
“The Fed banks’ losses don’t increase federal budget deficits. But the now-vanished big profits that they used to send the Treasury did help hold down the deficit, which is $1.6 trillion so far this fiscal year.”
This situation is unsustainable, particularly considering that the U.S. debt has now reached $33 trillion. While some may blame the Fed for initially raising interest rates, it is important to recognize that without such measures, inflation would not have returned to 3.2%, and the cost of living would have continued to put pressure on the economy.
Ultimately, the high demand for short-term bonds and money market funds reflects the trillions of dollars injected into the economy during the peak of the pandemic. However, even with a fixed 5% yield on a three-month investment, there is no guarantee that inflation will stay below this threshold for a long time.
Furthermore, investors face the risk of dilution each time the U.S. Federal Reserve injects liquidity into the market through the sale of assets from its balance sheet or when the Treasury raises the debt limit.
It is unlikely that fixed-income returns will outpace inflation for another 12 months because at some point, the government will run out of funds and be forced to issue additional Treasurys.
Real estate and stocks losing their value
There is uncertainty regarding which sector or asset class will benefit the most when inflation catches up with short-term Treasury yields. The S&P 500 index is currently 7% below its all-time high, while the real estate market is strained due to mortgage rates reaching their highest levels in over two decades.
Investors are concerned that the Fed may need to further raise interest rates to combat inflationary pressures. As the cost of capital continues to rise, corporate earnings will be under pressure, leaving investors with no safe haven for their cash reserves.
Currently, Bitcoin and other cryptocurrencies may not seem like a reliable hedge option, but this perspective could change as investors realize that the U.S. government’s debt ceiling is essentially limitless. It may be wise to gradually accumulate these assets regardless of short-term price trends.
Image Source: Pierre Borthiry – Peiobty@Unsplash
