Something strange is going on at the Federal Reserve

The Federal Reserve has not had an operating loss since 1915. However, that more than a century-long streak came to an end this year.

Profits and losses aren’t usually thought of as a consideration for central banks, but rapidly mounting red ink at the Federal Reserve and many peers risks becoming more than just an accounting oddity.

The bond market is enduring its worst selloff in a generation, triggered by high inflation and the aggressive interest-rate hikes that central banks are implementing. Falling bond prices, in turn, mean paper losses on the massive holdings that the Fed and others accumulated during their rescue efforts in recent years.

As a central bank which can literally print money, this short-term loss of $20 Billion doesn't mean that much. This goes double for the central bank of the globe's reserve currency.
However, it is still significant in two ways:
1) It causes a significant short-fall in payments to the U.S. Treasury.

Instead of having to pay income taxes, the Fed sends all of its income to the Treasury Department. Since 2001, the Fed has remitted $1.36 trillion to the Treasury Department. In 2022, it remitted $76 billion.

This is now expected to drop to zero. What is going to happen instead is that the Fed will be sending a significant amount of money to Wall Street banks. This is to pay a nominal amount of interest on cash deposits that the Fed requires the banks to keep at the Fed.
The Fed never paid interest on these deposits until 2009.

2) The Federal Reserve is often on the bleeding edge of new and extreme trends in the financial system. The Fed losing money is a once-a-century event that most likely has even deeper meanings that aren't yet obvious.
If you want to understand how the Fed actually works you must ignore what they say and only pay attention to they do. Let me give a few examples.
In December of 2007 the Fed began buying mortgage-backed securities. It was later determined that the recession started the very same month. In February of 2008, Fed Chair Ben Bernanke declared "very slow growth in 2008, but no recession."
The Fed began loaning hundreds of billions of dollars to Europe very early in 2008, but Europe's currency crisis didn't strike until 2010.
The Fed injected $4.5 Trillion into the financial system late in 2019, but the general public wasn't aware there was a problem until March of 2020.

So what new and extreme trend in the financial system is happening now?
We may not be sure of the main event for months, but one trend that is happening right now is central banks losing money and needing bailouts.

Several central banks have already fallen into negative equity in the past without it causing big problems, including those in the Czech Republic, Sweden, Chile, Israel and Mexico.
...
Some central banks are also suffering losses on the large bond portfolios acquired over recent years. The Reserve Bank of Australia recently announced an A$37bn ($25bn) accounting loss on its pandemic bond purchase programme, leaving it with a negative equity position of A$12bn. 

The UK’s Office for Budget Responsibility estimated that the Bank of England would need to be paid £133bn by the government over the next five years to cover losses on its quantitative easing portfolio.
...An extreme example is the Swiss National Bank, which warned in October that it had already made a record loss of SFr142.4bn ($152bn) in the first nine months of this year, mostly from losses on its investments made with its foreign exchange reserves.

The Bank of England is a good example. The country with the world's reserve currency as recently as a century ago, is being forced to send taxes directly to the central bank to cover for their losses in order to prevent the British Pound from collapsing.

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Cassiodorus's picture

-- is how the Fed hopes to preside over a system in which it is continually obliged to cover the losses of the biggest "players," while at the same time hiking interest rates to the point at which people, some people, will stop borrowing money. Everyone predicts a recession this year. Why shouldn't it be a really, really, really severe one?

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"But in America particularly, a deep worry is now consciously gnawing the ruling class—they can see it, feel it: that the American Empire is on its last legs, close to collapse."-- Simplicius

Markers are being called in that can not be paid except by taking measures that significantly devalue the dollar.

As a central bank which can literally print money, this short-term loss of $20 Billion doesn't mean that much.

The illusion of the ongoing viability of the publicly traded “assets” is being propped up with regular infusions of dollars of ever decreasing “value”.

What is going to happen instead is that the Fed will be sending a significant amount of money to Wall Street banks.

But perhaps the most significant, and most intractable, challenge is being posed by the emergence of what is being called a “multi polar global economy” that trades in currencies other than the US$.

The full faith and credit of the US Government suffered when it shucked the restraints of a tangibles based asset (gold or natural resources), chose to dominate the global economy through the IMF and military might has brought us to the point of having only faith and force to offer for surety.

The Emperor Empire is not wearing any clothes, and much of the rest of the world is taking notice and beginning to hedge its bets by joining alliances using alternate exchange mediums besides the US$.

The implications of this shift are profound and dangerous. Without faith, force is all we’ve got.

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“What the herd hates most is the one who thinks differently; it is not so much the opinion itself, but the audacity of wanting to think for themselves, something that they do not know how to do.”
-Arthur Schopenhauer (1788-1860)

usefewersyllables's picture

has begun.

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Twice bitten, permanently shy.

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Cassiodorus's picture

@humphrey -- that both Japan and China each held about a trillion in dollars and dollar-denominated assets:

Japan, China cut holdings of U.S. Treasuries to multi-year lows -data

China's hoard of U.S. government debt dropped as well to $980.8 billion in May, still the lowest since May 2010 when its holdings were at $843.7 billion, data showed. In April, China had $1.003 trillion in Treasuries.

But how believable are these numbers? They could be right, I don't know, but I have to imagine that the Bank of China holds more than a trillion dollars in Treasuries.

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"But in America particularly, a deep worry is now consciously gnawing the ruling class—they can see it, feel it: that the American Empire is on its last legs, close to collapse."-- Simplicius

@Cassiodorus
that’s over $94,000 per person and is increasing at the rate of over $30,000 PER SECOND.

What’s a trillion or two here or there? Nothing to worry about here. /s

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“What the herd hates most is the one who thinks differently; it is not so much the opinion itself, but the audacity of wanting to think for themselves, something that they do not know how to do.”
-Arthur Schopenhauer (1788-1860)