The U.S. Federal Reserve (Fed) recently announced unprecedented losses of around $1 trillion. This announcement raises crucial questions about the future of the US dollar, the world’s reserve currency, and the impact this could have on the global economy. In this article, we look at the reasons for these losses, their implications for the dollar and the growing role of the BRICS in the international monetary landscape.
The causes of the Federal Reserve’s losses
The Fed’s losses are mainly attributable to its interest rate hikes, which were put in place to combat runaway inflation. By raising rates, the Fed had to pay higher interest on the bank reserves and securities it holds, which significantly reduced its profits. In 2023, the Fed recorded interest of $281 billion, well above the previous year’s figure.
In addition, the Fed had to cope with a depreciation of its asset portfolio, particularly Treasury bonds. As the bond market experienced heightened volatility, the value of these assets plummeted, compounding the central bank’s losses. This situation highlights the challenges facing the Fed in an uncertain economic environment, where monetary policy decisions have a direct impact on its finances.
Implications for the US dollar
The Fed’s loss of $1,000 billion could have significant consequences for the US dollar. Historically, the dollar has been considered a safe haven, underpinned by the stability of the US economy and investor confidence. However, these losses could erode this confidence and prompt certain countries to diversify their foreign exchange reserves.
The BRICS (Brazil, Russia, India, China and South Africa) are already seeking to reduce their dependence on the dollar. By considering the creation of an alternative currency, these countries could potentially destabilize the dollar’s position as the world’s main reserve currency. If this trend continues, it could lead to reduced demand for the dollar, affecting its purchasing power and value on international markets.
