Fed’s alchemy

Let’s have some fun with some Fed accounting. During zero interest rate policy period, after the GFC, the Fed bought a ton of bonds at or below 2% yield. That portfolio consists of Treasury and agency bonds, all of them with duration. At year-end 2025, the Fed’s domestic portfolio carried an ~$844 billion unrealized loss. Long-duration Treasuries (-$458bn) and agency MBS (-$309bn) got hammered as rates rose. That’s probably north of $1Tn loss at today’s yields. And counting. But here’s the thing: the Fed doesn’t mark these bonds to market. It holds them at amortized cost. Those losses live in the footnotes, not the income statement. They don’t erode capital, and they don’t affect remittances to Treasury.

What does hurt is the Fed’s operating loss, paying 4.4% on reserves to banks while earning 2-3% on its old bonds. That’s created a ~$244 billion “deferred asset,” meaning the Fed currently sends nothing to Treasury. On the other hand, the Treasury owns 261.5 million ounces of gold. The Fed only holds gold certificates, locked by statute at $42.22/oz since 1973. At today’s market price (~$4,400/oz), that gold is worth ~$1.1Tn. If Congress revalued it, the Treasury would gain that amount in spending power via the TGA. But this does not offset the Fed’s bond losses. It’s a balance-sheet swap: Fed assets up, Fed liabilities (TGA deposit) up. No income. No interest. The Fed’s net interest margin, and its deferred asset, stays exactly the same. So how does this help the yield curve? Indirectly, and only on the Treasury side.

If Treasury can fund operations via a gold revaluation instead of issuing new debt, it reduces net Treasury supply hitting the market. Less supply = less upward pressure on yields. It also gives the Treasury flexibility to refinance expensive debt more selectively, smooth auction calendars and avoid crowding out at the long end. It doesn’t change the Fed’s unrealized loss. And it requires an act of Congress, not a phone call from the Treasury Secretary. But it gives Bessent the necessary dry powder to avoid long term yields run up. At least temporarily, provided the gold is there, which is another big “if”. The treasury is expected to by “at least” $4Bn of bonds starting next Tuesday, but he doesn’t have much money to fund those purchases, unless he issues more debt (good luck) or he goes gold hunting into the Fed’s books. Let’s see what happens.

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