Two months ago, we noted that the Federal Reserve held about $9 trillion of assets that are primarily treasury bonds and mortgage backed securities (that the Fed is not allowed to hold). We wrote that these assets decline in value when interest rates rise, and that if the Fed accelerated the pace of quantitative tightening, it was going to see massive losses.
Bloomberg just realized the same thing. The chart below shows losses from the peak on treasuries of around 20%. The multi-trillion mortgage backed securities portfolio has to be at an even larger discount to that right now.
So here’s an interesting question: If the Fed recognized $2 trillion of losses on a mark-to-market basis, and doesn’t sell those assets, would it still count as quantitative tightening?