【By Fei Shan Guan Jin Studio】

According to a report by the Financial Times on December 17 local time, since 2023, JPMorgan Chase has withdrawn nearly $350 billion in cash from its Federal Reserve account and invested most of it in U.S. Treasury bonds, in an attempt to hedge against the risk of profit erosion caused by potential interest rate cuts and to prepare for a period of declining interest rates.

Data tracking agency BankRegData showed that JPMorgan Chase, with assets exceeding $4 trillion, has significantly reduced its balance in the Federal Reserve account from $409 billion at the end of 2023 to $63 billion in the third quarter of this year.

At the same time, JPMorgan Chase's holdings of U.S. Treasury bonds increased from $231 billion to $450 billion, which allows it to lock in higher yields in anticipation of Federal Reserve rate cuts and prepare for subsequent interest rate declines.

This fund transfer reflects that as the largest bank in the United States, JPMorgan Chase is preparing for the end of a period of easy profitability. During previous profitable periods, banks could earn interest by depositing cash with the Fed while only paying near-zero interest to most depositors.

JPMorgan Chase Federal Reserve Cash Reserves and U.S. Treasury Holdings Chart The Financial Times

Between 2022 and early 2023, the Federal Reserve rapidly raised its target federal funds rate from near-zero levels to over 5%. Subsequently, the Federal Reserve began to lower this target range at the end of 2024 and has hinted at further rate cuts. This month, the Federal Reserve lowered its rate to the lowest level in three years.

"The intention of JPMorgan Chase to shift funds from the Federal Reserve account to Treasury bonds is clear," said Bill Moreland, founder of BankRegData. "A rate cut is inevitable, and they are acting in advance to gain an advantage."

JPMorgan Chase did not comment on the matter or disclose the maturity structure of its Treasury portfolio or the specific scale of risk management through interest rate swap contracts.

Notably, during the low-interest period from 2020 to 2021, JPMorgan Chase avoided large-scale long-term bond investments, which contrasts sharply with competitors like Bank of America. The latter suffered significant paper losses in 2022 when interest rates rose sharply, due to their large allocation of long-term bonds during the low-interest period.

Additionally, JPMorgan Chase's stable deposit base has also provided support during high-interest rate cycles: while the income from cash deposits in the Federal Reserve account was high, its cost of paying interest on deposits remained low, further amplifying the interest margin. Now, moving cash into Treasury bonds in advance aims to maintain this profit advantage after rate cuts and reduce the impact of interest rate declines on earnings.

In terms of market impact, the scale of JPMorgan Chase's fund withdrawal has even offset the net inflow and outflow of funds from the accounts of more than 4,000 other U.S. banks. Since the end of 2023, the total deposits of U.S. banks in the Federal Reserve have decreased from $1.9 trillion to about $1.6 trillion.

Since 2008, the Federal Reserve has paid interest on deposits held by banks in their accounts (IORB), a tool that has become one of the core instruments for the Federal Reserve to regulate short-term interest rates and influence financial system liquidity. In the past two years, the Federal Reserve's interest expenses have risen sharply, with $186.5 billion spent on deposit interest alone in 2024.

However, the practice of the Federal Reserve paying deposit interest to banks has always been controversial. In October this year, the U.S. Senate rejected a bill that would prohibit the Federal Reserve from paying deposit interest. Republican Senator Rand Paul, who pushed for the bill, argued that the Federal Reserve pays billions of dollars to banks, allowing these funds to sit idle, which is a waste of public resources. Other Republican senators, including Ted Cruz and Rick Scott, also expressed opposition to this.

In a report released at the beginning of this month, Paul pointed out that the top 20 institutions receiving Federal Reserve deposit interest since 2013 have accumulated $305 billion; among them, JPMorgan Chase received $1.5 billion in interest income in 2024, while the bank's total profit that year was $58.5 billion.

This article is exclusive to Observers News. Unauthorized reproduction is prohibited.

Original: toutiao.com/article/7585094377383445007/

Statement: This article represents the views of the author.