This comment is by Alan Sloana freelance business journalist and seven-time winner of the Loeb Award, business journalism’s highest honor.
Now that the Federal Reserve’s 18-month rate hike may finally be coming to an end, it’s a good time to take a look at some of the big winners created by the Fed’s interest rate hikes. And while we’re at it, let’s have some fun with the numbers by revisiting some of the biggest losers.
The winners, of course, are money-market mutual funds, which are now up 30,000%—or more than 300 times—than they were in February 2022, the month before the Fed starts raising short-term interest rates. To fight inflation.
The losers were the Federal Reserve’s 12 regional banks, which went from posting huge collective profits to huge losses as a result of the rate hike. We discussed this topic a few months ago, but you can bet it’s going to get a lot of attention when the total loss hits the strategic $100 billion mark. This can happen at the end of September.
It’s actually pretty funny when you go back and look at it. Here’s the Fed, which has been raising rates for 18 months straight in an attempt to curb inflation and slow down (but not crash) the economy. As a result, the income of all types of individual and institutional money market fund investors has increased. But the Fed itself is losing more and more money.
Before the Fed started raising rates, regional banks were very profitable. In the year In 2021, they sent a surplus of $107.4 billion to the Treasury. But let me explain the reason a little bit, the Fed’s rate hike has evaporated the profits of the Fed banks, and the funds sent to the Treasury this year have completely disappeared.
Now, let me show you a mutual fund account.
As Peter Crane of Crane Data told me in 2015, As of February 2022, the average interest earned by money market fund owners was 0.02 percent. The fund’s assets totaled $5.009 trillion, which equates to about $1 billion a year in profits.
But as of July 31 this year, Crain’s told me, the fund’s interest rate was 5.08% and its assets were up to $5.903 trillion. By Crane’s calculations, the fund’s products were running at $299.9 billion a year.
But wait, there’s more. In the year As of Aug. 18, Crain’s said the funds’ average yield was up to 5.15 percent. At a very conservative estimate, the funds give their owners more than $300 billion a year.
But Crain cautions that $300 billion-plus is an “annualized” rate — take the current situation and flip it over for a full year. It is not money that holders actually collect.
Fund holders’ incomes have been rising as the funds buy short-term securities and over the past 18 months the Fed has raised the short-term federal funds rate from zero to 5.25%-5.50%. Mutual fund holders’ incomes have increased with the Fed’s rate hikes.
“Five percent is the magic number,” Crane says. “It takes psychological import, and money starts pouring into mutual funds at 5%. That’s what happened in the late 90s and early 2000s. That’s what’s happening now.”
But while mutual fund investors are making more than 30,000% more than they did before the Fed began raising rates in March of last year, the Fed itself is – surprisingly – posting losses due to the rate hike.
The Fed’s 12 regional banks, which had earned the most revenue, are now running huge collective deficits. Because they are paying more than 5% on trillions of dollars borrowed from money market funds and other financial institutions, while their own portfolios are loaded with the low-yielding mortgages and Treasury securities they bought at the time. Close to zero interest.
The Fed’s banks, which we’ll talk about the other day, have been borrowing at a high cost to keep interest rates low and to keep funds and bank assets from swamping the financial system. This would undermine the Fed’s inflation prevention strategy.
In the year As of June 30, what the Fed calls “deferred assets”—but what I call “losses”—totaled $74.7 billion, according to the Fed’s latest semiannual financial report.
Stephen Church of Piscataqua Research in Portsmouth, N.H., who first brought the Fed’s bank losses to my attention, says losses are running at about $2 billion a week, reaching $77.1 billion for the year at the end of August, and The loss was $94.5 billion. In September, he expects the loss to reach 100 billion dollars, which I think will be a very interesting number.
The surplus sent by the Fed’s banks to the Treasury through June 30 was just $102 million, down more than 98 percent from the $62.8 billion sent as of June 30 last year, before the increase had a major impact on financial markets and the Fed’s bank profits.
By law, the Fed’s regional banks have to make enough profit to dig themselves out of the “old asset” hole before they start sending hard money to the Treasury again.
The bankruptcy of the Fed’s banks does not increase the federal budget deficit. But the large surplus that the Treasury was sending now has helped keep the deficit at $1.6 trillion this fiscal year. That may be the case at a time when taxpayers are threatened by rising government debt. And politicians may see these losses as a reason to increase their criticism of the Fed, which is already quite loud.
In other words, mutual fund investors’ gains are to some extent the Fed’s – and the Treasury’s and US taxpayers’ – losses.
I don’t know what the future holds for mutual fund investors – no one does. But now they are reaping huge profits from the Fed’s rate hikes. And they will remain big winners for the foreseeable future at least.
So if you have valuable money-market mutual fund accounts, it’s time to get excited. Enjoy it while you can.
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