The Federal Reserve issued a major announcement on September 14, revealing a cumulative loss of US$100 billion in 2023.What’s more, this situation is expected to deterioration Reuters reported that the Federal Reserve. But for risky assets like Bitcoin (BTC), this could actually be a blessing in disguise.
Fed plunges into red
The main reason behind this financial setback is that interest payments on the Fed’s debt exceed the earnings it generates from the debt it holds and the services it provides to the financial sector.
As a result of this development, investors are now scrambling to understand how this will affect interest rates and demand for provably scarce assets like Bitcoin.
Some analysts believe the Fed’s losses, which began a year ago, could double by 2024. The Fed classifies these negative results as “deferred assets,” deeming there is no immediate need to recoup these losses.
The Federal Reserve used to generate revenue for the U.S. Treasury
Historically, the Fed has been a profit-making institution. However, the lack of profits does not hinder the central bank’s ability to conduct monetary policy and achieve its objectives.
Related: How Will Fed’s Interest Rates Impact Crypto Markets?
The fact that the Fed’s balance sheet is in the red is not surprising, especially given the massive rate hikes, from near zero in March 2022 to the current level of 5.25%. Reuters suggested that even if interest rates remain unchanged, the Fed’s losses may continue for some time. This can be attributed to the expansionary measures implemented by central banks in 2020 and 2021 as they aggressively purchased bonds to avoid a recession.
Reuters suggested that even if interest rates remain unchanged, the Fed’s losses may continue for some time. This can be attributed to the expansionary measures implemented by central banks in 2020 and 2021 as they aggressively purchased bonds to avoid a recession.
Essentially, the Fed operates like a traditional bank in that it must provide returns to depositors, which are largely made up of banks, money management companies and financial institutions.
An article in Barron’s effectively illustrate The impact of the $100 billion loss, noted,
“The losses at the Fed banks will not increase the federal budget deficit. But the huge profits they used to send to the Treasury are now gone and do help curb the deficit, which has reached $1.6 trillion so far this fiscal year.”
Clearly, this situation is unsustainable, especially considering that U.S. debt now stands at $33 trillion. While people may blame the Fed for raising interest rates in the first place, it is important to recognize that without these measures, inflation will not return to 3.2% and the cost of living will continue to put pressure on the economy.
Ultimately, the huge demand for short-term bonds and money market funds reflects the trillions of dollars that were pumped into the economy during the peak of the pandemic. However, even if one accepts a fixed 5% return on a three-month investment, there is no guarantee that inflation will remain below this threshold for an extended period of time.
Additionally, investors face dilution risk every time the Fed injects liquidity into the market, whether by selling assets on its balance sheet or the Treasury raising the debt limit.
Ultimately, fixed income returns are unlikely to beat inflation over the next 12 months because at some point, governments will run out of money and be forced to issue additional Treasury debt.
Real estate and stocks are no longer reliable stores of value
Which industry or asset class will gain the most when inflation catches up with short-term Treasury yields remains a big unanswered question. The uncertainty comes as the S&P 500 trades just 7% below its all-time high and the housing market shows signs of strain as mortgage rates reach their highest levels in more than two decades.
On the one hand, the S&P 500 doesn’t appear to be overvalued, trading at 20 times forward earnings — especially compared to previous peaks of 30 times or more. However, investors are worried that the Federal Reserve may be forced to raise interest rates further to combat current inflationary pressures.
As capital costs continue to rise, corporate profits will come under pressure and investors will have no safe haven for their cash reserves.
At the moment, Bitcoin and other cryptocurrencies do not appear to be a viable hedging option, but that view may change as investors realize that the U.S. government’s debt ceiling is essentially unlimited. Therefore, it may make sense to accumulate these assets over time regardless of short-term price trends.
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This article is for general information purposes only and is not intended to be, and should not be construed as, legal or investment advice. The views, thoughts, and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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