1. Home
  2. Financial Planning
  3. The Fed

The Fed

Reading a financial tome the other day, I see:

"The law gives the Fed power to trade in the bond market. The FOMC can direct the 'easing' of credit by having its trading desk in NY buy US Treasury bonds. This pumps money into the banking system and eventually into the larger economy. On the other hand, the committee can tighten credit by selling Treasury bonds. This withdraws money from the banking system and the economy,

Ok, I give up. From/to whom are those Treasury bonds bought and/or sold? And how does this take money out of, or put money back into, the economy. Where are those bucks that are used for purchases and where do they go when bonds are sold? Into a warehouse somewhere?

In other words, I am missing the mechanics of the situation somehow. Anyone care to enlighten me?

SM

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
Sosimo Memelas
Loading thread data ...

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

Reply to
xhoster

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

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Reply to
Will Trice

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.