SF Fed Paper States Central Bank Will Not Have Big Losses on Higher Rates

The Federal Reserve, whose balance sheet has swollen to more than $4 trillion as the U.S. central bank has worked to push down borrowing costs and boost the economy, probably will not sustain big losses once interest rates start rising, according to research from the San Francisco Fed.

There is only a 5 percent chance that the price of the Treasuries held by the Fed will fall below their face value in 2015 and result in capital losses for the central bank, according to the study by the regional Fed bank’s head of research, Glenn Rudebusch, and two colleagues.

There is also only a 5 percent chance that rising rates would result in the Fed paying out more in interest to banks as part of its eventual monetary tightening than it earns in fixed payments on its securities, the researchers found.

“Our analysis shows that the likelihood of significant losses on the Fed’s Treasury portfolio or a long cessation of Treasury remittances is very low,” they wrote.

The research is aimed at addressing rising concern within the central bank that the Fed could face political pressure if capital losses or a rise in interest payments force it to reduce or eliminate the tens of billions of dollars in profits it sends to the Treasury each year.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza