The Fed

The Fed has "primary dealers" with whom they conduct trades. But those dealers can be acting for their own accounts, or for the accounts of their customers. So indirectly, the sellers/buyers are whoever owns bonds and wants to sell them, or has money and wants to buy bonds.

If they buy bonds, the person who used to own the bond now owns money. That money usually didn't previously exist, the Fed created for the purpose of buying the bonds.

The transactions are mostly electronic. The "money" just disappears, the same way it just appeared when first created. It is possible that indirectly it will result in some paper money getting moved into some non-circulating vault somewhere, but that is doubtful, and not very important to the big picture.

Xho

I don't think the Fed creates and destroys money in this instance. I believe that the Fed has a war chest of money that was allocated to the Fed for its purposes. So the Fed can buy bonds to inject money into the system, and sell bonds to take money back out. In fact, if we were to pay off the national debt, the Fed would have to deal in some other type of security. The Fed generally earns a profit on its trading activities and gives money back to the U.S. general fund. Right now that war chest has pretty much been expended as the Fed has been injecting cash by buying bonds.

I've probably slaughtered the details, but someone here will likely correct me...

-Will

william dot trice at ngc dot com

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