Federal Reserve

Rising Interest Rates and the Fed’s Red Ink

Posted on Friday, December 17, 2010

If Ben Bernanke were an investor, he’d be disappointed . The first chunk of the Federal Reserve’s $600 billion Treasury bond purchase program is in the red, thanks to rising yields. The central bank’s cheap financing makes outright losses unlikely, but Mr. Bernanke, the Fed chairman, could still face an image problem.
To the extent the Fed’s second round of so-called quantitative easing, colloquially known as QE2, was designed to keep a lid on interest rates, it has backfired. Since the program was introduced in early November, five-year yields have marched more than 0.9 percentage points higher, eradicating the initial yield slump seen after the Fed first hinted a few months earlier that another round of easing was in the cards.
When bond yields rise, prices fall. As a result, the Fed’s first $116 billion of QE2 purchases were worth approximately $113 billion at the end of active trading on Tuesday, a paper loss of nearly 3 percent.
Of course, the Fed won’t be selling those securities anytime soon. The economy and employment situation will have to improve noticeably before that happens. But a continuation of the recent rise in yields would bring much lower valuations by then.
Even so, the Fed may not actually lose any money over all, thanks to its low cost of funds and the interest payments rolling in on its holdings. In fact, the Fed’s supersize balance sheet — now at $2.4 trillion — is a bit of a cash cow for the Treasury. In 2009, when it was smaller, the Fed plumped the government’s coffers by $47.4 billion.
Yet the slide in government bond values gives detractors ammunition for questioning the Fed’s judgment. The extraordinary QE2 policy was supposed to stimulate the economy by keeping interest rates low. So far, the opposite has happened. Moreover, the tax-related deal in Congress — if passed — arguably reduces the need for it. When Mr. Bernanke next has to convince lawmakers that QE2 was a good idea, the red ink could work against him.
Concept of the Year
Mark Zuckerberg, a founder of Facebook, has been crowned Person of the Year by Time magazine. Julian Assange, the leader of WikiLeaks, meanwhile, topped the associated reader poll. Uncommon levels of self-belief, and superior coding abilities, aren’t the only parallels between the two men. Both are leading the technological assault on privacy.
The two organizations have obvious differences in scale and intent. Facebook has more than 500 million users and is profitable. It aims to give people “the power to share.” WikiLeaks is a small nonprofit that believes, among other things, in “the revealing of suppressed and censored injustices.”
But the two organizations share a devotion to the idea that society benefits when more is made public. Facebook’s personal information-sharing facilitates everything from keeping up with friends living overseas to finding fellow beekeepers in Bushwick. WikiLeaks, by contrast, explicitly encourages “leaks” of ethical, political and historical significance, including as it turns out state secrets, in the hope of reducing corruption and increasing political accountability.
Whether either Facebook or WikiLeaks will live up to their leaders’ divergent but comparably idealistic hopes is questionable. Extra status updates can bring friends closer or just irritate, and personal data shared online can reveal more than is healthy. Likewise, making ambassadorial dispatches public can shine a disinfecting light on a government’s role in unsavory deals — or hurt efforts to forestall damaging conflicts, and put undercover agents in harm’s way.
Both organizations are gaining status and so are their leaders, as the Time selections attest. This may, however, be their golden hour. Technology has made it much harder to keep things hidden or to hush them up once exposed. But the costs of bringing formerly private things to light are likely to become increasingly evident.
Both Facebook and WikiLeaks are in the vanguard of exploiting the Internet’s power to collect and broadcast once-confidential information. Whatever the constraints eventually imposed on either model, the genie is out of the bottle. Already, privacy is the person — or rather the casualty — of the last year. AGNES T. CRANE and ROBERT CYRAN

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