Fed unlikely to have significant losses as rates rise: paper

SAN FRANCISCO Mon Mar 24, 2014 2:13pm EDT

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013.

Credit: Reuters/Jonathan Ernst

SAN FRANCISCO (Reuters) - The Federal Reserve, whose balance sheet has swollen to more than $4 trillion as the U.S. central bank has worked to push down borrowing costs and boost the economy, probably will not sustain big losses once interest rates start rising, according to research from the San Francisco Fed.

There is only a 5 percent chance that the price of the Treasuries held by the Fed will fall below their face value in 2015 and result in capital losses for the central bank, according to the study by the regional Fed bank's head of research, Glenn Rudebusch, and two colleagues.

There is also only a 5 percent chance that rising rates would result in the Fed paying out more in interest to banks as part of its eventual monetary tightening than it earns in fixed payments on its securities, the researchers found.

"Our analysis shows that the likelihood of significant losses on the Fed's Treasury portfolio or a long cessation of Treasury remittances is very low," they wrote.

The research is aimed at addressing rising concern within the central bank that the Fed could face political pressure if capital losses or a rise in interest payments force it to reduce or eliminate the tens of billions of dollars in profits it sends to the Treasury each year.

(Reporting by Ann Saphir; Editing by Leslie Adler)

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Comments (3)
moxsee wrote:
Loss? It is one company, one entity, one balance sheet, one US government. It was a zero sum.

Mar 24, 2014 2:26pm EDT  --  Report as abuse
beofaction wrote:
Here is the key sentence in this distortion: “There is only a 5 percent chance that the price of the Treasuries held by the Fed will fall below their face value in 2015…” Notice it says, “2015″. For Reuters to be the propaganda organ for the Feds and imply by the headline that there will never be losses is unconscionable. The only way the Fed will not sustain losses is if they unwind their balance sheet before rates rise, or if the age-old inverse relationship between interest rates and bond prices suddenly ceases to exist. And that won’t happen because no one in their right mind will pay the same price for a bond that pays them a lower interest rate when they can buy one paying a higher rate!

Mar 24, 2014 2:45pm EDT  --  Report as abuse
Gorm wrote:
REALITY is QE was little more than a back door approach to stimulating growth, by inflating assets, and giving the illusion of wealth with the expectation this would lead to increased SPENDING, consumption, jobs, expansion, etc.

FACT is the Fed has created another bubble. It has added about $3T in increased liquidity via $$$ printing. If inflation rises the Fed, employing OMO should be soaking up that liquidity with additional Treasury sales. Just what are they selling, and at what loss to produced a marketable yield?

When one considers our Fed dumped Fed Funds and Discount and virtually all banks are complaining of WEAK loan demand, our Fed should have KNOWN 1) consumers were reluctant to borrow (Debt levels, uncertain economy, housing bubble busting) and 2) early on the financials were AFRAID to lend but to the most pristine borrower and NOW they can’t find enough. Was our Fed just “giving the illusion” that low rates, given their historical role, are SUPPOSED to make borrowing more affordable and therefore induce business and consumers to borrow, etc, etc?

Mar 25, 2014 3:28pm EDT  --  Report as abuse
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