Letter: On this measure, the Fed is already in negative equity

Published in the Financial Times:

“Are central banks going bankrupt?” Robin Wigglesworth asks (FT Alphaville, FT.com, October 10).

He points out that the Federal Reserve has disclosed a $720bn unrealised loss on its investments as of June 30 of this year. By now, this loss is much bigger.

Paul Kupiec and I have estimated it at about $1tn — an especially remarkable number when compared to the Fed’s total capital of $42bn.

Moreover, the mark-to-market loss presages cash operating losses on the way, as the Fed will be funding low-yielding fixed rate investments with expensive floating rate liabilities, generating negative net interest income — just like a 1980s savings and loan.

Depending on the path of interest rates, these operating losses could go on for some years. “Central bank negative equity,” Wigglesworth writes, “coming to a Fed or BoE or ECB near you soon?”

On a mark-to-market basis, Federal Reserve negative equity in size is already here. Alex J Pollock Senior Fellow, Mises Institute Auburn, AL, US