(ORDO NEWS) — For the first time in 13 years, the US Federal Reserve has decided to cut staff, CCTV reports. This is a consequence of the Fed’s aggressive increase in interest rates, experts say, because it was such radical measures that drove the agency into losses, and it will not be possible to correct the situation for a long time.
According to CNN, on September 22, a representative of the US Federal Reserve said that the agency would cut about 300 people by the end of this year. The Fed is taking such measures for the first time in 13 years. The number of Fed employees has reportedly grown in recent years as the agency’s influence on economic and regulatory processes has expanded. The Fed will make cuts for the first time since 2010, mainly affecting support staff.
The Fed lost more than $57.3 billion in the first half of the year.
The cuts come at a sensitive time for the Fed. According to the agency’s financial report, it suffered huge losses, which gradually continue to increase. Data for the first half of this year show that the Fed’s assets stood at $8.34 trillion at the end of June, while losses in the first half of the year exceeded $57.3 billion.
Expert analysis: The Fed’s current aggressive interest rate hikes have hit itself hard
Analysts believe the Federal Reserve’s damage stems largely from apparent mismatches between the maturities of assets and liabilities in its financial statements. In addition, the Fed’s rapid expansion of its balance sheet and the aggressive rate hikes it began last year are also among the reasons why the agency is facing net operating losses. We can say that the aggressive rate hike this time hit the Fed itself with a ricochet.
To combat high inflation in the United States, the Federal Reserve launched a round of interest rate increases in March 2022. The authority made 11 hikes in total, raising rates by a combined 525 basis points. This caused them to soar to their highest level in 22 years.
Experts say the Fed’s balance sheet suggests the agency owns a large amount of U.S. Treasuries – being fixed-income securities, they generate limited interest income when rates are low. As the Federal Reserve raised rates sharply, market yields increased, and the precipitous decline in Treasury prices was one of the main reasons for the Fed’s losses.
High interest rates also provoke a mismatch between assets and liabilities on the Federal Reserve’s balance sheet: discount rates on Fed assets are low, but on liabilities they are high, which, in turn, leads to a widening gap between the structure’s income and expenses.
Hu Jie, a professor at the Graduate School of Finance at Shanghai Transport University, said that since the US Federal Reserve has continuously raised interest rates over the past year, this has led to an increase in interest rates throughout the market. As a result, the assets owned by the Fed – that is, many government bonds – became worthless. So from an accounting perspective, the Fed is indeed losing money.
According to Wang Qing, chief macro analyst at Dongfang Jincheng, since the Federal Reserve earns less interest from holding low-rate bonds, its earnings are also relatively small, according to reports. On the liability side, the Federal Reserve’s liabilities represent primarily deposits of financial institutions at the Fed itself. After raising interest rates since March last year, interest on deposits was expected to increase, so the volume of payments to investors from the Federal Reserve became correspondingly larger.
The result was an interest rate mismatch on the balance sheet, widening the gap between the Fed’s income and expenses, causing the agency’s balance sheet losses to widen. More importantly, based on the outcome of the body’s latest meeting, the Fed may have to keep interest rates high for some time to come. This also means that the Fed will continue to suffer losses for a long time. This is the main reason for the staff reduction – and it can also be seen as another consequence of the previous sharp rise in interest rates.
In addition, cuts will affect support staff. Experts say this is due to the introduction of new technologies.
Tian Lihui, dean of the Institute of Financial Development at Nankai University, said that as new technologies are deployed, the organizational structure of server support departments needs to be more adjusted to meet emerging needs. Thus, changes in job functions are another reason why the Federal Reserve decided to cut staff.
Contact us: [email protected]
To eliminate any confusion arising from different time zones and daylight saving changes, all times displayed on our platforms are in Coordinated Universal Time (UTC).