(Bloomberg) — Profits and losses are not considered central bank considerations, but the rapid rise in red ink at the Federal Reserve and many of its peers may become more than the account difference.
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The bond market is enduring its worst selloff in a generation, fueled by rising inflation and aggressive interest rate hikes by the central bank. The decline in bond prices, in turn, means paper losses on the huge holdings that the Fed and others have amassed during their bailout efforts in recent years.
Raising interest rates also involves the central bank paying more interest on the deposits that commercial banks deposit with them. This has pushed the Fed into operating deficits, creating a hole that may require the Treasury Department to fill by selling debt. The UK Treasury is preparing for a Bank of England bankruptcy.
Britain’s move underscores a dramatic shift in countries including the United States, where the central bank is no longer a major contributor to government revenue. The U.S. Treasury will see a “dramatic swing,” from last year’s $100 billion withdrawal from the Fed to a potential annual loss of $80 billion by the end of the year. of the year, Amherst Pierpont Securities LLC said.
The account deficit threatens criticism of the asset-buying program designed to save markets and the economy, most recently when Covid-19 shut down large parts of the global economy in 2020. Coincidence at the current rate of inflation, which may prompt calls for control. the independence of monetary policymakers, or limit the steps they can take in the next crisis.
“The problem with central bank deficits is not just the deficits – they can always be refinanced – but the central bank’s political backlash is likely to increase,” said Jerome Haegeli, head ‘the economy at Swiss Re, who used to work at Swiss’s. central bank.
The following figures show the scope of operating losses or trading losses in emerging markets today:
The Fed’s delivery of US Treasuries reached a negative $5.3 billion as of October 19 — a stark contrast to the positive numbers seen as recently as late August. A negative number equals an IOU that will be repaid with future earnings.
The Reserve Bank of Australia posted a deficit of A$36.7 billion ($23 billion) in the 12 months to June, leaving it with a deficit of A$12.4 billion.
Dutch central bank governor Klaas Knot warned last month that he expects a combined deficit of about 9 billion euros ($8.8 billion) next year.
The Swiss National Bank reported a loss of 95.2 billion francs ($95 billion) for the first six months of the year as the value of foreign deposits fell – the worst first-half performance since It was founded in 1907.
While for developing countries, central bank deficits can undermine confidence and contribute to migration in general, this type of challenge does not exist for rich countries. that’s for sure.
According to Seth Carpenter, chief global economist for Morgan Stanley and a former official at the US Treasury: “There is no material impact on their ability to manage the monetary policy in the short term deficit.”
RBA deputy governor Michele Bullock said in response to questions last month about the Australian central bank’s stance that “we don’t believe there is any impact on our ability to operate.” After all, “we can create money. That’s what we did when we bought the bonds,” he said.
But it can have consequences. The central bank has become a politically charged institution after, by its own admission, it failed to anticipate and act quickly against inflation in the last year or so. Losses add another magnet for criticism.
The impact of the ECB
For the European Central Bank, the possibility of a deficit comes after years of government bond purchases despite reservations from conservative officials who said the line was blurring. exists between fiscal and monetary policy.
With inflation at five times the ECB’s target, pressure is mounting for bond issuance – a process known as mass tightening that the ECB is currently preparing even as the economic outlook darkens.
“Although the deficit is not a clear economic constraint for the central bank, there is a possibility that it will become a more political constraint on the ECB,” said George Cole and Simon Freycenet, economists at Goldman Sachs. Group Inc. Especially in northern Europe, this “could stimulate discussions about quantitative easing.”
President Christine Lagarde gave no indication that the ECB’s decision on QT would be driven by the prospect of a deficit. He told lawmakers in Brussels last month that profit-making was not part of the central bank’s job, and insisted that fighting inflation remained the “sole objective” of the central bank. the politicians.
The Bank of Japan remains detached for now, has not raised interest rates and continues to post a negative rate on its share of bank reserves. But things could change when Governor Haruhiko Kuroda steps down in April, and his successor faces historically high inflation.
As for the Fed, Republicans have previously expressed opposition to its practice of paying interest on bank deposits. Congress gave this authority in 2008 to help the Fed control interest rates. With the Fed now in deficit, and Republicans likely to control at least one chamber of Congress in November’s midterm elections, the debate could resurface.
The Fed’s changes can be quite remarkable. After paying the Treasury $100 billion in 2021, it could face a deficit of more than $80 billion a year if policymakers raise rates by 75 basis points in November and 50 December numbers – as expected by the market – forecasts. Stephen Stanley, chief economist at Amherst Pierpont.
Without the income from the Fed, the Treasury would need to sell more debt to the public to fund government spending.
“It may be too subtle to hit the public radar, but a populist can spin the story in a way that doesn’t reflect well on the Fed,” Stanley wrote in a note to of customers this month.
–With assistance from Garfield Reynolds.
(Adds reference to Bank of Japan after sub-heading ‘BOJ, Fed’.)
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