Venmo requesting JPowell… Everyday folks are struggling with higher interest rates, from mortgages to hefty credit-card payments. But Jack and Jill aren’t the only ones: central banks are suffering from their own medicine.
- The Fed’s losing money — something it’s never consistently done before. That’s partly because it now has to pay higher interest to banks for depositing money at the Fed (think: reserves and overnight loans).
- Losses are piling up: The Fed’s interest payouts now exceed the $8T+ that it earns on Treasury bonds and other securities. FYI: in recent years, it earned about $100B in profit, which is sent to the Treasury to reduce federal deficits.
- Not just the US: Central banks worldwide are dealing with the fallout of their inflation-fighting rate hikes, which don’t seem likely to slow anytime soon. Eurozone inflation just hit a record 10.7%.
The name’s bond… Higher interest payments on bank deposits aren’t the only problem. The bond market is experiencing its worst selloff in a generation. As rates rise, the value of existing bonds falls. People are selling old bonds as new ones are issued at higher rates.
- That’s bad for the Fed and other central banks that racked up huge bond portfolios to help stimulate their pandemic economies (bond-buying = more cash in circulation).
- As bond prices plunge, banks are watching the value of those holding plummet. The central banks of Australia, Switzerland, and the Netherlands are already seeing red. Global government-bond losses are on track for the worst year since 1949.
Pressure might not “break” the bank… but enough political backlash might make it adjust course. While losses don’t hamper central banks’ ability to conduct monetary policy (aka: do their job), they’re drawing concern from politicians. Without income from the Fed, the Treasury needs to borrow more to fund government spending. Now, calls are growing to slash the interest payments that central banks make to commercial banks.