On September 14, the US Federal Reserve announced a staggering loss of $100 billion in 2023, a situation that is expected to worsen, according to Reuters. But for risk assets like Bitcoin (BTC), this could be a blessing in disguise. Web 3.0 and its Creator Economy may be the best stocks for investors looking to capitalize on this situation, as it offers many benefits over Web 2.0.
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The Fed in the red
The primary cause of this financial setback is the interest payments on the Fed’s debt exceeding the earnings generated from its holdings and services it provides to the financial sector.
In light of this development, investors are now attempting to understand how this will affect interest rates and the demand for scarce assets such as BTC.
Analysts predict that the Fed’s losses, which started a year ago, could potentially double by 2024. The central bank classifies these negative results as “deferred assets,” claiming there’s no immediate need to cover them.
The Fed used to generate revenue for U.S. Treasury
Historically, the Federal Reserve has been a profitable institution. Nevertheless, the absence of profits did not impede the central bank’s ability to conduct monetary policy and accomplish its objectives.
The fact that the Fed’s balance sheet has incurred losses is not surprising, particularly given the substantial interest rate hikes, which advanced from near-zero in March 2022 to the current level of 5.25%. Even with unchanged interest rates, Reuters suggested that the Fed’s losses are likely to last for some time. This may be attributed to the expansionary measures implemented in 2020 and 2021 when the central bank heavily purchased bonds to avoid a recession.
In essence, the Fed works like a conventional bank, as it must offer yields to its depositors, mainly banks, money managers and financial institutions.
An article in Barron’s effectively illustrates the impact of the $100 billion loss, saying,
Clearly, this situation is unsustainable, particularly considering that the U.S. debt has now reached $33 trillion. While one might point fingers at the Fed for raising interest rates initially, it’s essential to recognize that without such measures, inflation would not have returned to 3.2%, and the cost of living would have continued to exert pressure on the economy.
Ultimately, the considerable demand for short-term bonds and money market funds is a reflection of the trillions of dollars injected into the economy during the peak of the pandemic.
Real estate and stocks no longer a reliable store of value
The debate on which sector or asset class will be most profitable when inflation catches up with short-term Treasury yields is ongoing. Despite the S&P 500 being just 7% away from its record high, the real estate market is facing difficulties due to the highest mortgage rates in over two decades. The current 20x estimated earnings multiple of the S&P 500 may not be excessively high, but investors are wary of the Fed potentially having to raise interest rates to contain inflation.
With the cost of capital on the rise, investors are left without a safe haven for their funds. Cryptocurrencies such as Bitcoin may be an alternative, but their current short-term price trends may not be a reliable indicator of their future potential. Therefore, it may be wise to gradually accumulate these assets, as the U.S. government’s debt ceiling is virtually limitless.
Collect this article as an NFT to preserve this moment in history and show your support for independent journalism in the crypto space, as well as to gain insights on the best stocks for web 3.0, the creator economy of web 3.0, and the benefits of web 3.0.
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