For the first time in 108 years, the Fed is losing money, and the Fed is also laying off workers

It turns out that the Fed is not an "iron rice bowl" either. Although the Fed has been claiming that the economy is good" and "employment is strong" recently, it needs to "cut it quickly" first. A Fed spokesman told the media on Friday that the Fed system will cut about 300 jobs by the end of this year, the first time the Fed has cut the number of employees since 2010. The layoffs also come at a sensitive time for the Federal Reserve. According to the Fed's earnings report, the institution posted its first loss on its books in 108 years, and the losses are gradually expanding.

The half-year loss exceeded $57.3 billion

The Federal Reserve, or the Federal Reserve System, is the central bank of the United States. In 1913, the U.S. Congress passed the Federal Reserve Act, and the U.S. Federal Reserve System was born. To prevent power from being too concentrated in Washington, the capital, lawmakers spread control across the country. According to the bill, the Federal Reserve System consists of the Federal Reserve Board in Washington, D.C., 12 regional Federal Reserve banks, and the Federal Open Market Committee.

Unlike the central banks of many countries, which are completely government departments, the Fed adopts a public-private partnership system of "federal government + non-profit institutions". The Federal Reserve is the core governing body of the Federal Reserve and belongs to government agencies, while the 12 Federal Reserve Banks are non-profit institutions located in major cities across the country.

Moreover, unlike federal agencies that spend taxes allocated by Congress, the Fed is self-funded. Generally, the rate of return on long-term assets is higher than the expenditure on short-term debt, and the Fed relies on long-term securities on hand (such as long-lived U.S. Treasury bonds and mortgage-backed securities) for higher income, and lower reserves and reverse repo rates paid to commercial banks, resulting in positive net income.

According to the U.S. Treasury website, the Fed's revenue comes mainly from its holdings of high-quality long-term assets, and its expenses mainly come from operating expenses and short-term debt (reverse repo interest paid to commercial banks, etc.). Currently, the Fed holds about $8.4 trillion in U.S. Treasuries and mortgage-backed securities (MBS) on its balance sheet.

In recent years, the agency's headcount has been growing year over year as the Fed's influence on the economic and regulatory agenda has expanded. The Fed's 2022 annual report shows that there are about 21,000 employees in the Fed system, and this time 300 employees are laid off, accounting for a small proportion of the total number, about 1.4%.

The Fed did not explain the reasons for the layoffs. However, from publicly available information, the layoffs may be related to the Fed's losses. According to the Fed's financial report, the Fed's net operating loss in the first half of 2023 reached $57.384 billion, and the annual operating net loss may exceed $100 billion, while the Fed's last annual operating net loss was in 1915, 108 years ago.

Yang Jinghao, chief economist of Kangkai Data Technology, told the Beijing Business Daily reporter that the Fed's layoffs are mainly trying to reduce the cost of hiring and open source and reduce costs. However, compared with the Fed's losses in the first half of the year, the effect of cutting labor costs is more symbolic than practical.

The consequences of rate hikes

Some industry insiders analyzed that although the Fed is not a for-profit institution, because it controls high-quality core assets, normally its operation will generate net income (equivalent to the net profit of private enterprises), and the annual net income will be handed over to the US Treasury to support the operation of various departments of the US government. This year, the Fed has rarely experienced a net loss (equivalent to the net loss of private companies), and can no longer "transfuse" the US Treasury, the fundamental reason is that the Fed is raising interest rates too rapidly.

Yang Jinghao also said that the core of the Fed's huge losses lies in the imbalance between income and expenditure. Since the epidemic in 2020, the Fed has intervened urgently and used monetary policy tools to provide liquidity support to the market, including tools that can be extended or renewed, which are equivalent to the Fed becoming the largest counterparty to financial assets held by US financial institutions, including depository financial institutions and monetary funds. The Fed buys a higher proportion of financial assets from them in U.S. Treasury bonds and mortgage-backed securities (MBS).

"But with the Fed already raising the federal funds rate to its current rate of 5.25%-5.5%, the Fed is facing similar problems to U.S. commercial banks, paying extremely high interest payouts and holding lower average yields on financial assets compared to interest rates." Yang Jinghao said.

Yang Jinghao further analyzed that as of the second quarter of this year, the average yield of US Treasury assets held by the Fed was only 1.96%, and the average yield of MBS was slightly higher, but it was only 2.2%. Compared to the current interest rate level of more than 5%, the Fed's daily repo agreement interest rate will have a negative spread exposure of nearly 3%. Therefore, it is reasonable for the Fed to have a maturity mismatch in its holdings. This is also a result of the structure of the Fed's balance sheet as a central bank.

Global markets are under pressure

For the future, Yang Jinghao believes that although the Fed is now passively reducing its balance sheet at the rate of $60 billion of Treasury bonds and $35 billion of MBS per month, that is, it will not be renewed when due, considering the size of the Fed's rapidly expanding balance sheet during the epidemic in 2020 and the high interest rate and long-term monetary policy environment that the Fed needs to adhere to to achieve the 2% target inflation rate, the scale of the Fed's operating losses may further expand in 2024.

Edward Parker, managing director of Fitch, a leading credit rating agency, said: "Rising interest expense is an important risk to public finances and sovereign ratings, especially in developed countries. In line with this logic, Fitch downgraded the U.S. sovereign credit rating earlier this year.

Not just the Fed, but rate hikes have put an unbearable weight on global markets. According to a report released by the Institute of International Finance on September 19, total global debt increased by $10 trillion in the first half of 2023 to a record high of $307 trillion. And global debt has increased by $100 trillion over the past decade.

Emre Tiftik, lead author of the IATA study, said: "Our concern is that countries will have to allocate more and more funds for interest payments, which will have long-term implications for countries' financing costs and debt dynamics. The report shows that more than 80% of the world's new debt in the first half of this year came from mature market countries, with the largest increases in the United States, Japan, the United Kingdom and France.

However, some people also said that the Fed started layoffs at this time, or it had little to do with its operating losses. Because based on the Treasury's earnings carry-over mechanism, the Fed only needs to open a white slip and promise to pay it back when it becomes profitable in the future. "Losses are indeed a problem for an ordinary bank, but the Fed is not an ordinary bank." As Ryan McMaken, senior editor at the Mises Institute, puts it, "The Fed is effectively a government agency run by government technology officers that enjoys the benefits of little to no congressional oversight." ”

Beijing Business Daily reporter Fang Binnan, Zhao Tianshu/Wen

Xinhua News Agency/Photo