US Federal Reserve's $100 Billion Losses Benefit Bitcoin Amid Uncertainty
Summary:
US Federal Reserve reports $100 billion in losses in 2023, expected to worsen, benefiting Bitcoin as investors seek safe haven amid uncertainty over interest rates and demand for scarce assets. Fed's losses attributed to interest payments surpassing earnings from debt holdings and financial services. Some analysts predict losses could double by 2024. Fed classifies losses as "deferred assets" with no immediate need for coverage. US debt reaches $33 trillion as inflation rises. Uncertainty remains over which sector or asset class will benefit as inflation catches up with short-term Treasury yields.
The US Federal Reserve revealed on September 14 that it has accumulated losses of $100 billion in 2023, a situation that is expected to worsen, according to Reuters. However, this could actually be a positive development for risk assets like Bitcoin (BTC). The main reason behind the Fed's financial setback is that the interest payments on its debt have exceeded the earnings from its holdings and services provided to the financial sector. Investors are now trying to understand how this will impact interest rates and the demand for assets like BTC. Some analysts believe that the Fed's losses, which began a year ago, could double by 2024. The central bank classifies these negative results as "deferred assets" and argues that there is no immediate need to cover them. Despite the absence of profits, the Fed can still conduct monetary policy and achieve its objectives. The losses incurred by the Fed's balance sheet are not surprising, given the substantial interest rate hikes that have occurred. Even if interest rates remain unchanged, Reuters suggests that the losses are likely to persist for some time due to the expansionary measures implemented to prevent a recession. The Fed functions like a conventional bank and must provide yields to its depositors, which primarily consist of banks, money managers, and financial institutions. The $100 billion loss incurred by the Fed does not increase federal budget deficits but the profits it used to send to the Treasury helped hold down the deficit. This situation is unsustainable, especially considering that US debt has now reached $33 trillion. While some may blame the Fed for raising interest rates initially, it is important to recognize that these measures were necessary to combat inflation and relieve economic pressure. Due to the trillions of dollars injected into the economy during the pandemic, there is significant demand for short-term bonds and money market funds. However, there is no guarantee that fixed-income returns will outpace inflation because at some point the government will need to issue additional Treasurys. It is unclear which sector or asset class will benefit the most when inflation catches up with short-term Treasury yields. The S&P 500 index is trading at 20x estimated earnings and does not appear excessively valued, but the fear is that the Fed may have to raise interest rates further to combat inflation. This could put pressure on corporate earnings and leave investors with nowhere to secure their cash reserves. While Bitcoin and other cryptocurrencies may not seem like a viable hedge option at present, this perspective could change as investors realize the limitless nature of the US government's debt ceiling. Therefore, it may make sense for investors to gradually accumulate these assets regardless of short-term price trends.
Published At
9/18/2023 7:30:00 PM
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