Was reading an article a month or so ago in Grant's that I revisited today in the light of a potential 75 bp hike by the Fed. It was talking about the Fed having to post an operating loss above 2.3% federal funds rate due to its ultra-high leverage. Interest income is going to be dwarfed by the trillions in interest-bearing liabilities as the rate goes up.

The question becomes how long can they sustain that operating loss without a loss of confidence from the market or until they have to drop the charade of independence? If they have to correct that operating loss, they're going to have to shrink the balance sheet rapidly.

Is there a real mathematical limit to the Fed's ability to raise rates? If so, what happens when we hit that limit and inflation hasn't calmed down yet?

Buck Compton said:

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Was reading an article a month or so ago in Grant's that I revisited today in the light of a potential 75 bp hike by the Fed. It was talking about the Fed having to post an operating loss above 2.3% federal funds rate due to its ultra-high leverage. Interest income is going to be dwarfed by the trillions in interest-bearing liabilities as the rate goes up.

The question becomes how long can they sustain that operating loss without a loss of confidence from the market or until they have to drop the charade of independence? If they have to correct that operating loss, they're going to have to shrink the balance sheet rapidly.

Is there a real mathematical limit to the Fed's ability to raise rates? If so, what happens when we hit that limit and inflation hasn't calmed down yet?

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see what happened in 2018 when the Fed last tried to raise rates..

LMCane said:

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Buck Compton said:

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Was reading an article a month or so ago in Grant's that I revisited today in the light of a potential 75 bp hike by the Fed. It was talking about the Fed having to post an operating loss above 2.3% federal funds rate due to its ultra-high leverage. Interest income is going to be dwarfed by the trillions in interest-bearing liabilities as the rate goes up.

The question becomes how long can they sustain that operating loss without a loss of confidence from the market or until they have to drop the charade of independence? If they have to correct that operating loss, they're going to have to shrink the balance sheet rapidly.

Is there a real mathematical limit to the Fed's ability to raise rates? If so, what happens when we hit that limit and inflation hasn't calmed down yet?

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see what happened in 2018 when the Fed last tried to raise rates..

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That was a market reaction (giant sell-off) to the rate hike, no? It wasn't a mathematical constraint on the ability to impact interest rates, right?

The market is relatively okay with rate hikes right now to get inflation in check, so that reaction won't be nearly the same. I was more curious on the mathematical limit due to the heavily-leveraged balance sheet.

Here's Lyn Alden, who is WAY smarter than any of us, talking about it. In her opinion it 2018 had less to do with the 20% sell off and more to do with the credit markets freezing up.

I agree with her the highest probability is the fed has to reverse course and inflate the debt away or the US will default on debt.

https://podcasts.apple.com/us/podcast/palisades-gold-radio/id1439485214?i=1000566330900