Letter: Fed at the forefront of inflation-driven losses

Published in the Financial Times.

Martin Wolf (“Inflation’s return changes the world”, Opinion, July 5) rightly points out the “further problems . . . as losses build up in institutions most exposed to property, interest rate and maturity risks.”

He does not mention that the institution with the biggest losses of all from interest rate risk, the one most changed by inflation’s return, is none other than the world’s leading central bank. In the past nine months, the Federal Reserve has suffered previously unimaginable operating losses of $74bn from its deeply underwater interest rate risk position, a loss which far exceeds its total capital of $42bn. In misleading and arguably fraudulent accounting, the Fed refuses to reduce its reported capital by these losses; with proper bookkeeping, it would now be reporting capital of negative $32bn, growing more negative every month. It insists that no one should care about its negative capital, but carefully cooks the books to avoid reporting it.

The Fed is on the way to operating losses of an estimated $110bn this year. Its mark to market loss as of March 31 2023 was $911bn. The Fed has no possibility of generating offsetting gains from revaluing gold, since it owns exactly zero gold. Wolf reasonably asks if “economies must be kept permanently feeble in order to stop the financial sector from blowing them up”. We can likewise ask, “Must central banks make themselves so feeble in order to prop up economies and the financial sector?”