Higher rates increase the risk of future Fed losses

The Federal Reserve’s plans to raise interest rates aggressively to fight high inflation could have an overlooked and uncomfortable side effect for the central bank: capital losses.

The potential for losses depends on obscure monetary plumbing. The Fed’s $9 trillion portfolio, sometimes referred to as a balance sheet, is replete with mostly interest-bearing assets — treasury bills and mortgage-backed securities — with an average yield of 2.3%. On the other side of the ledger — the liabilities of the Fed’s balance sheet — are bank deposits held with the Fed, called reserves, which also bear interest, as well as currency in circulation.


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