A huge loss of $114.3 billion Are the consequences of the Federal Reserve's aggressive interest rate hikes evident?

On March 26th Eastern Time, the Federal Reserve released its audited 2023 financial statement. The report shows that in 2023, the Federal Reserve's total expenditure was $114.3 billion higher than revenue, resulting in an operating loss of $114.3 billion, the highest annual loss since the institution's records began.

It can be said that compared to 2022, the Federal Reserve's interest expenses in 2023 have almost doubled, but interest income has decreased. In contrast, the Federal Reserve recorded a net profit of $58.8 billion in 2022.

The latest Federal Reserve interest rate meeting indicates that the federal funds rate will be maintained between 5.25% and 5.5% this year. Although the market had previously expected three rate cuts, the dot matrix chart shows that the median federal funds rate for 2024 is 4.6%, and there are still expectations of rate cuts.

Previously, the Federal Reserve had been aggressively raising interest rates for about two years. Since March 2022, there have been a total of 11 interest rate hikes, an increase of 450 basis points, which has led to a large amount of US dollars flowing back to the United States. Despite the decrease in US dollar reserves around the world, transactions are still ongoing: European countries choose the euro, Russia only uses rubles and yuan, Middle Eastern countries tend to prefer the yuan, and India chooses the rupee. This means that most countries no longer consider the US dollar as a hard currency.

The US dollar has returned to the United States, but countries have turned to other currencies for trading, which has made the US feel uneasy. The United States originally hoped to dominate the global economy through the US dollar, but did not expect other countries to trade without relying on the US dollar. Now, the United States holds a large amount of dollars but faces the risk of inflation.

The interest rate hike cycle in the United States has always been a topic of great concern, but this time its performance is exceptionally eerie. In past interest rate hikes, the United States has often been extravagant, leading to financial crises and then using the tide of the US dollar to harvest the world and overcome its own crises. But this time, the situation seems a bit different.

The operating losses of the Federal Reserve have exacerbated the already huge US fiscal deficit. The US Treasury Department announced in January this year that the US government's fiscal deficit for the first quarter of fiscal year 2024 exceeded $500 billion, a year-on-year increase of 21%. Among them, the deficit in December reached $129 billion, a sharp increase of 52% year-on-year.

It can be said that investors have been holding their breath waiting for the news of the Federal Reserve's interest rate cut, but JPMorgan Chase strategist Aronov believes that in the current environment, the Federal Reserve has no convincing reason to cut rates.

Aronov pointed out in an interview that the economy is performing well, with unemployment rates below what the Federal Reserve considers neutral levels, and even in their long-term forecasts, inflation rates are above targets, and the economy does not seem to be constrained by these interest rates. It's difficult to understand why they are cutting interest rates now without any problems.

From the situation back then, if interest rates were to be lowered now, it would inevitably lead to high inflation, reduced consumption capacity, and a serious recession of the US economy; But if we continue to delay interest rate cuts, resulting in increasing interest expenses, debt crises, and debt defaults, it will have even more serious consequences.

And if the United States dare not lower interest rates, it can only hold on and not let go. With the US debt about to break through 35 trillion yuan, Yellen was at a loss besides being anxious. Japan sold $224.5 billion, Saudi Arabia sold $73.4 billion, and US Treasury bonds currently have interest rates above 5.25%, but no one has taken up the offer.

Generally speaking, in normal circumstances, interest rate hikes can lead to the return of the US dollar to the United States, triggering a chain reaction that includes outflows of foreign exchange reserves, falling asset prices, currency depreciation, inflation outbreaks, and even potentially triggering debt crises and economic collapse. However, in recent years, the aggressive interest rate hikes by the US dollar have not achieved the desired results, which has raised doubts about the stability of US financial hegemony.

Even professionals point out that various signs during the interest rate hike cycle indicate that the United States has not reaped the benefits of other countries as usual, which may be related to its attempt to promote the internationalization of the renminbi.

From the current situation, the economic and financial situation in the United States is not optimistic. Faced with political, military, and economic challenges, as well as changes in the global geopolitical situation, its financial hegemony is facing unprecedented tests. How to maintain financial stability and economic growth under such circumstances is a challenge that the US government, especially the Federal Reserve, must face.