It really has been an awful few years for the Federal Reserve and they should thank their lucky stars that most of the time the general public and its elected officials have absolutely no idea what the Fed is actually saying and doing. It also helps that nobody seems to care that many of Fed’s leaders trade on inside information or speak to and potentially give material non-public information to a select groups of individuals. Remember the Seinfeld episode where George gets fired for having sex with the cleaning lady on his desk in his office.
George Sleeps With Cleaning Lady
“Was that wrong, should I not have done that? I tell you I have to plead ignorance because if anyone said anything to me at all when I first started here that that sort of thing was frowned upon…. “
Senior officials had to know that what they were doing was just plain wrong, regardless of any fuzziness in ethical standards and policy. At the Fed you don’t sleep with the cleaning person in the office, and you don’t trade with or give inside information to enrich yourself or your position. Easy
Anyway, at least they are good at their jobs, right? Well, not really. When you consider the fact that they completely missed the housing fiasco in the 2000’s that caused the Great Financial Crisis and that they botched their chance to control inflation in 2021 I’d say they really aren’t very good at their jobs. The only thing they seem to be good at is using their vast powers to inject liquidity into the financial system to bail out the banking system from a problem that usually they “helped” create. When you think about it, that part of the job is relatively easy, there’s a fire right next to you, you have the world’s biggest hose and hydrant, you just turn it on full blast to put out the fire and worry about the ocean of water you flooded the landscape with at a later date. Cleaning up the flood is actually really hard work and that is what the Fed is trying to do now. So far it hasn’t been going too well and on Monday a fascinating article appeared in Bloomberg News.
https://www.yahoo.com/now/fed-losing-billions-wiping-profits-060001473.html
For over a decade the Fed has run a balance sheet of Treasury notes and Agency Mortgage-Backed Securities (MBS) anywhere between $2.5 trillion and $8 trillion. The treasuries and MBS held by the Fed earns interest. The way the Fed funds these purchases is with the excess reserve accounts held by the big banks who sold the Fed the Treasuries and MBS. Up until this year when the Fed started raising the rate they pay banks on excess reserves, it was a lot lower than the yield on the assets. That meant that the Fed was earning at times $150 billion a year! Where did that money go? It went to the Treasury, who in turn used that money to plug the holes in the annual budget deficit. Now the Fed is ready to raise the rate they pay the banks on excess reserves to 4% next week and at least to 4.5% in December. Meanwhile the $8 trillion assets are yielding 2% at best and will not be going higher. In 2022, the “income” the Fed remits to Treasury is now close to zero. In 2023, even if the Fed stopped raising rates after they push the reserve rate to 4.5% this December (and they are not stopping) the Fed will actually lose anywhere from $80 billion to $100 billion in 2023 with losses in the billions in the years to follow. The Fed will not pay for this, we will because now the opposite happens. Treasury will have to issue more debt to plug the Fed’s deficit hole! And of course, Treasury borrowing rates have nearly tripled since the beginning of 2022, so it will cost a whole lot more.
Well done!
The Fed...The Gift That Keeps Taking
...and don't forget, "George" also gave her the cashmere sweater that had an imperfection!
Maybe it wasn’t the Feds job to control inflation after the fact since it was mostly price gouging and overspeculation, which was caused by the Fed injecting unneeded trillions of dollars to the capital gains class. And yes price gouging is incentivized with supply chain issues to hide behind and lots of new money that can be serviced as debt if they raise prices.
Still it’s not the Feds job to stop price gouging. Seems like anti-price gouging measures and capital gains taxes would’ve been the better route.
Plus the Fed not injecting non-household funds in the first place. Regular household consumers still needed money, since they’re not the cause of this inflation (past 2% anyway).