The US central bank suffered the biggest losses in history

US central bank in rare and huge losses

The central bank of the United States, the Federal Reserve, has faced huge losses. Meanwhile, the Fed's losses have exceeded 100 billion or 10 trillion dollars. It is feared that the amount of losses may increase further in the future.

It now has to pay more interest than it used to earn on Federal Reserve bonds. While there is some uncertainty about where things will go, some observers believe the Fed's losses could double before tapering off.

The news agency Reuters talked to William English, a former official of the Fed and currently a professor at Yale University. According to him, the Fed's losses could reach 200 billion or 20 trillion dollars by 2025.

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It is feared that they will not be able to generate the amount of money that the Fed will have to earn to provide profit to the revenue department of the government in the future. A company's balance sheet is called a deferred asset. However, it is rare for the Fed to suffer losses like this.

Despite losses, the Fed is mindful of its responsibilities. They said the losses would not be a hindrance in formulating monetary policy or achieving targets.

However, the Fed's losses are not surprising, according to Reuters. This is bound to happen as they have aggressively raised policy rates since March 2022 to drive higher inflation, the news said. Inflationary pressures are easing now. Many believe that the Fed will no longer raise policy rates or that rates are close to their maximum.

The Fed has been aggressively buying bonds since the coronavirus pandemic. Basically they buy bonds in this way to keep the interest rate low and give wind to the economy. This process is known as 'Quantitative Easing', through which huge amount of money has been transferred to the financial system. Borrowing has also become easier for traders and consumers.

But in the past year, the Fed has sold over a trillion dollars of Treasury and mortgage bonds to the market. They also said they will sell more bonds. When the Fed sells bonds, they take money from the market. Due to this there is liquidity crisis in the market. When they withdraw money from the market, interest payments also decrease.

The Federal Reserve mainly collects money through deposits from commercial banks and reverse repo. That's why the Fed has to pay interest to banks and money managers. When liquidity decreases, the Fed's cost of paying interest decreases, i.e., the deposit and reverse repose rates decrease.

William English also said, 'Slowly the Fed's losses will come down, even if policy rates remain high. Deposit and reverse repo rates are falling, but interest on the new securities the Fed is buying is rising. However, the situation is so uncertain that the process is not smooth at all, but very complicated.

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Meanwhile, deposits in banks in the United States are falling. Last Wednesday, its amount stood at 333,000 billion dollars, 100 billion dollars less than in the last part of 2021. However, the daily outstanding amount of reverse repo has also come down, from $2 trillion in June 2022, to $1.5 trillion last Thursday. Analysts believe that this situation will improve in the second half of this year.

Over the past decade, the Fed has deposited huge sums of money into the government's revenue department. The budget deficit of the government has been filled with that money. Now he is facing loss. As a result, it will not be possible for him to return the money to the revenue department of the government for some time.

James Bullard, former head of the Fed's St. Louis branch, said it would have been nice to have some of the $100 million the Fed has paid the Revenue Department over the past decade to make up for the loss, but the law doesn't have that provision. However, analysts believe that the Fed will return to the previous trend.