It’s unclear to me whether anything the Fed does ever costs it’s anonymous members anything.
>>It’s unclear to me whether anything the Fed does ever costs it’s anonymous members anything.<<
It’s unclear to most people. That’s the reason you don’t read any articles describing their current predicament.
If people understood the tremendous conflict of interest the Fed has created for itself, they’d be factoring that conflict into their discussion as to why the Fed has held rates near zero for so long. They don’t understand it, however, and so you never see it mentioned.
Essentially, if the Fed ends up with a 5% fed funds rate in, say, two years, their cash flow, which has always been positive, will go negative, and at the same time their long maturity portfolio will be far, far, underwater, possibly to the tune of as much as half a trillion dollars because it could drop as much as 20%, or more for that matter.
And they could also possibly generate some significant inflation pressure at the same time, although that’s not inevitable. The negative cash flow and the extensive portfolio losses would, however, be inevitable if they raised rates back to historical norms.
If you’re wondering about the implications, here they are:
Regarding their cash flow going negative, the Fed has always operated at a profit, but because the Fed is a creature of Congress it has always remitted those profits to the U.S. Treasury each year (after deducting operating costs.) Imagine the day that they are forced to go to a GOP-controlled Congress and have to ask for operating funds for the next year because they’ve managed themselves into a negative cash flow position for the first time ever and now need taxpayer funding to operate.
Regarding their potentially massive portfolio losses, consider this: The Treasury has been diligently extending maturities on the publicly-held national debt at these extremely low long term interest rates, which is an excellent move, locking in those rates for decades and reducing the exposure that would come from having to roll over maturing debt at higher and higher rates. Yet the Fed has offset that move, and then some, by purchasing even more long term maturities than the Treasury has extended, in net terms. So the Fed has more than unwound the Treasury’s move and thereby exposed the federal government (as an entity) to the risk that the Treasury has been trying to avoid.
As I said, few really understand this and it’s received very little attention thus far.