The Federal Reserve’s capital has turned negative for the first time in its history, raising concerns about the central bank’s ability to weather future financial crises.
The Fed’s capital, which is the difference between its assets and liabilities, fell to negative $20.9 billion at the end of 2020, according to its annual financial statements. This is a significant drop from the positive $39.1 billion in capital the Fed had at the end of 2019.
The negative capital position is largely due to the Fed’s massive balance sheet expansion in response to the COVID-19 pandemic. The central bank has purchased trillions of dollars in Treasury bonds and mortgage-backed securities to support the economy and keep interest rates low.
While these actions have been necessary to prevent a deeper economic downturn, they have also increased the Fed’s risk exposure. If the value of the assets on the Fed’s balance sheet were to decline significantly, it could wipe out the central bank’s capital and leave it unable to fulfill its mandate of maintaining price stability and promoting full employment.
To address this risk, the Fed has implemented several measures to strengthen its financial position. It has suspended its dividend payments to member banks, which will save it an estimated $19 billion per year. It has also established a new facility to purchase corporate bonds, which will diversify its asset holdings and reduce its reliance on Treasury securities.
Despite these efforts, some experts are still concerned about the Fed’s ability to weather future financial crises. The central bank’s capital position is now weaker than that of many of the banks it regulates, which could undermine its credibility as a regulator.
Moreover, the Fed’s ability to respond to future crises may be limited by political pressure. The central bank has already faced criticism from some lawmakers for its actions during the pandemic, and there is a risk that it could face even more scrutiny in the future.
In conclusion, the Fed’s negative capital position is a cause for concern, but it is not yet a crisis. The central bank has taken steps to strengthen its financial position, and it still has significant resources at its disposal. However, policymakers must remain vigilant and take steps to ensure that the Fed is able to fulfill its mandate in the years ahead.