The US Federal Reserve’s $100 billion loss disclosed on September 14 could potentially benefit decentralized cryptocurrencies like Bitcoin. As the pressure of the impending debt ceiling and interest rate payments increases, investors’ focus may shift to verifiably limited assets like Bitcoin, despite their risky nature.
The significant financial downturn for the Federal Reserve is primarily due to interest payments on its debts exceeding earnings from its holdings and financial sector services. This scenario has led to an increased analysis of its impacts on interest rates and demand for assets like BTC. Some experts argue that the mounting losses, which kicked off a year ago, could double by 2024.
Since its establishment, the Federal Reserve has been a profitable entity; however, it has now recorded losses due to substantial interest rate hikes. But the absence of profit doesn’t affect the Federal Reserve’s ability to conduct monetary policy & reach its goals. If the rates remain stable, Reuters predicts that these losses will persist. This is a repercussion of the expansionary plans executed in 2020 and 2021 when the Federal Reserve bought bonds aggressively to ward off a recession.
With financial similarities to an ordinary bank, the Federal Reserve, too, is anticipated to provide yields to its depositors, which mainly consist of banks, money managers, and financial institutions. The situation is further complicated by the vanishing profits that used to help reduce the federal budget deficit, contributing to the current $1.6 trillion deficit.
Considering the existing US debt standing at $33 trillion, the current scenario is, without a doubt, unsustainable. However, the initial interest rate hike by the Federal Reserve was necessary to bring down inflation to 3.2% and relieve the cost of living pressures on the economy.
Despite the great demand for short-term bonds and money market funds during the pandemic, there is no assurance that inflation will remain below the 5% yield over an extended period. Moreover, investors face the risk of dilution every time the Federal Reserve infuses liquidity into the market, either by selling assets from its balance sheet or when the Treasury pushes the debt limit up. Eventually, it seems unlikely that the returns from fixed-income will surpass inflation in the next 12 months as the government may run out of funds, necessitating the issuance of additional Treasurys.