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2022-06-27

The Federal Reserve of the USA is traditionally regarded as the most influential national central bank in the world.

Due to its latest decision to raise interest rates, and to the huge volumes of financial securities it purchased under QE in earlier times of lower interest rates, the book value of those securities has taken a significant hit. They don't pay as much, so they would sell for less, giving the Fed a loss should it either decide or need to sell them. Technically it could decide not to sell them until interest rates drop again, thus avoiding realisation of any loss, but a forced sale before then would realise the loss.

So will the Fed now run at a loss? Would it matter?

Might it even become insolvent? What would that mean?

These are a few of the most important questions of our time, and the AIER thoughtfully publishes an exploration of the implications. 

Of course, in order to evaluate the situation we must first understand how "the Fed" is structured through a network of 12 regional reserve banks, and how it relates to the US Treasury on the one hand and the various independent banks within each region on the other.

" ... unlike regulated banks and other financial institutions, no matter how big the losses it may face, the Federal Reserve will not fail and can continue to print money ... "

" ... this does not mean that Fed losses will never have an impact on its ability to conduct monetary policy"

Are you mentally prepared? 

Good - dive in!