WSJ Piece (MAY 22, 2022): Higher Rates Raise Risk of Future Fed Losses
https://www.wsj.com/articles/higher-rates-raise-risk-of-future-fed-losses-11653222600
Rising interest rates could one day lead the central bank to pay out more in interest than it earns, creating a political headache
My take (published in The Hill on April 19, 2022):
https://thehill.com/opinion/finance/3272668-is-4-percent-inflation-the-new-normal/
A second challenge facing the Fed involves its $9 trillion balance sheet. Unlike simplistic textbook narratives, the central bank no longer has the luxury of undertaking open market operations to shift its target for the federal funds rate (FFR). Instead, in the current ample reserves regime, the Fed utilizes two rate instruments – the interest on reserves (IOR) and the overnight reverse repurchase agreement rate (ONRRP) – to adjust its target policy rate. Essentially, raising the FFR target requires the Fed to also raise IOR and ONRRP.
If the yield curve were to invert, the Fed may encounter a balance sheet problem as it may be forced to pay out higher rates on bank reserves to large financial institutions even as it receives lower rates on its substantial holdings of long-dated U.S. Treasuries. This is certain to generate political backlash in Washington, D.C.
https://www.wsj.com/articles/higher-rates-raise-risk-of-future-fed-losses-11653222600
Rising interest rates could one day lead the central bank to pay out more in interest than it earns, creating a political headache
My take (published in The Hill on April 19, 2022):
https://thehill.com/opinion/finance/3272668-is-4-percent-inflation-the-new-normal/
A second challenge facing the Fed involves its $9 trillion balance sheet. Unlike simplistic textbook narratives, the central bank no longer has the luxury of undertaking open market operations to shift its target for the federal funds rate (FFR). Instead, in the current ample reserves regime, the Fed utilizes two rate instruments – the interest on reserves (IOR) and the overnight reverse repurchase agreement rate (ONRRP) – to adjust its target policy rate. Essentially, raising the FFR target requires the Fed to also raise IOR and ONRRP.
If the yield curve were to invert, the Fed may encounter a balance sheet problem as it may be forced to pay out higher rates on bank reserves to large financial institutions even as it receives lower rates on its substantial holdings of long-dated U.S. Treasuries. This is certain to generate political backlash in Washington, D.C.