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What happens to a bond when the Fed buys treasuries? Are they "cancelled"? Or does the Fed actually hold those bonds? The latter sounds nonsensical, but I don't

What happens to a bond when the Fed buys treasuries? Are they "cancelled"? Or does the Fed actually hold those bonds? The latter sounds nonsensical, but I don't know enough about how the Fed works.

obviouslynotme 6y ago
The Fed isn't part of the US government. They are a private bank with special powers granted by Congress. When they purchase USG bonds, they hold them and receive interest.
- atombender 6y ago
  But the Fed pays earnings back to the Treasury. And while the Fed is independent, it's certainly deeply intertwined with the US government. The Fed holding US government debt seems intuitively counterproductive to me.
  - obviouslynotme 6y ago
    They don't pay all earnings to the USG, only everything above a certain threshold IIRC. It's only counterproductive if you think like a normal person instead of a central bank. Their mission is to keep the dollar stable. They are doing that by keeping the USG stable. All the central banks are acting in concert right now to save the global financial system. My guess is that we are being slowly transitioned to removing the USD as the world reserve currency and replacing it with a World Bank electronic one.
    - spiralx 6y ago
      The US has been trying to reduce the usage of the USD as a reserve currency (it's the largest such currency but not the only one - EUR, GBP and JPY are also used) due to it not having any real benefit to the US while exposing its economy to the effects of financial crises around the world, which tend to lead to countries purchasing dollars and driving the price up which makes imports more expensive. --- Ben Bernanke (ex-FED Chairman) - The dollar’s international role: An “exorbitant privilege”? https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d... > A great deal of U.S. currency is held abroad, which amounts to an interest-free loan to the United States. However, the interest savings are probably on the order of $20 billion a year, a small fraction of a percent of U.S. GDP, and that “seigniorage,” as it is called, would probably still exist even if the dollar lost ground to other currencies... > The safe haven aspect of the dollar is actually a negative for U.S. firms, since it implies that they become less competitive (the dollar is stronger) at precisely the times that global economic conditions are most difficult. --- The ‘reserve currency’ myth: The US dollar’s current and future role in the world economy https://www.ussc.edu.au/analysis/the-reserve-currency-myth-t https://www.ussc.edu.au/analysis/the-reserve-currency-myth-t... > This safe-haven bid for US dollar assets means that the US dollar often behaves in ways that seem counter-intuitive relative to US economic fundamentals. As Figure 2 shows, the US dollar appreciates in response to economic policy uncertainty. A 1 per cent increase in the Global Economic Policy Uncertainty Index raises the real value of the US dollar by 0.2 per cent, controlling for relative interest rate, inflation and economic growth differentials with the rest of the world. > The appreciation exacerbates trade tensions between the United States and the rest of the world by weighing on US export competitiveness, setting in train a protectionist spiral. --- The IMF already has a global reserve asset called the Special Drawing Rights: https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14...
  - dragonwriter 6y ago
    > And while the Fed is independent, it’s certainly deeply intertwined with the US government. The Fed is…complicated. The Federal Reserve Board of Governors is an agency of the executive branch (an “independent” agency, but not independent of the government, independent within the government, like the FCC, FTC, and a number of other boards, commissions, etc.) The Federal Reserve System consists of a network of Federal Reserve Banks, each of which has a nine member board of directors, six of which are elected by member commercial banks, and three of which are selected by the Board of Governors. But the actual setting of monetary policy is done by the Federal Reserve Open Market Committee, which has 12 members — the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four of the other Federal Reserve Bank Presidents.
riffraff 6y ago
they hold them, receive payment, and redistribute it. There is a predetermined amount of the Fed dividends which gets payed to the constituent banks, and the rest is given back to the treasury. The same happens for the European Central Bank, and AFAICT, most central banks.
nerfhammer 6y ago
they hold the bonds. the fed has a balance sheet with whatever assets it holds. the fed just doesn't hold cash. any money it spends is created, any money paid to it ceases to exist. the fed buys bonds from the treasury department, which must slowly repay them as if the fed were any other bondholder. this provides a mechanism to reverse the creation of money, when bonds the fed holds are redeemed slightly more money than was created will be destroyed. Or they can destroy money by selling bonds on the open market earlier than that.

What happens to a bond when the Fed buys treasuries? Are they "cancelled"? Or does the Fed actually hold those bonds? The latter sounds nonsensical, but I don't know enough about how the Fed works.

obviouslynotme 6y ago

The Fed isn't part of the US government. They are a private bank with special powers granted by Congress. When they purchase USG bonds, they hold them and receive interest.

atombender 6y ago
But the Fed pays earnings back to the Treasury. And while the Fed is independent, it's certainly deeply intertwined with the US government. The Fed holding US government debt seems intuitively counterproductive to me.
- obviouslynotme 6y ago
  They don't pay all earnings to the USG, only everything above a certain threshold IIRC. It's only counterproductive if you think like a normal person instead of a central bank. Their mission is to keep the dollar stable. They are doing that by keeping the USG stable. All the central banks are acting in concert right now to save the global financial system. My guess is that we are being slowly transitioned to removing the USD as the world reserve currency and replacing it with a World Bank electronic one.
  - spiralx 6y ago
    The US has been trying to reduce the usage of the USD as a reserve currency (it's the largest such currency but not the only one - EUR, GBP and JPY are also used) due to it not having any real benefit to the US while exposing its economy to the effects of financial crises around the world, which tend to lead to countries purchasing dollars and driving the price up which makes imports more expensive. --- Ben Bernanke (ex-FED Chairman) - The dollar’s international role: An “exorbitant privilege”? https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d... > A great deal of U.S. currency is held abroad, which amounts to an interest-free loan to the United States. However, the interest savings are probably on the order of $20 billion a year, a small fraction of a percent of U.S. GDP, and that “seigniorage,” as it is called, would probably still exist even if the dollar lost ground to other currencies... > The safe haven aspect of the dollar is actually a negative for U.S. firms, since it implies that they become less competitive (the dollar is stronger) at precisely the times that global economic conditions are most difficult. --- The ‘reserve currency’ myth: The US dollar’s current and future role in the world economy https://www.ussc.edu.au/analysis/the-reserve-currency-myth-t https://www.ussc.edu.au/analysis/the-reserve-currency-myth-t... > This safe-haven bid for US dollar assets means that the US dollar often behaves in ways that seem counter-intuitive relative to US economic fundamentals. As Figure 2 shows, the US dollar appreciates in response to economic policy uncertainty. A 1 per cent increase in the Global Economic Policy Uncertainty Index raises the real value of the US dollar by 0.2 per cent, controlling for relative interest rate, inflation and economic growth differentials with the rest of the world. > The appreciation exacerbates trade tensions between the United States and the rest of the world by weighing on US export competitiveness, setting in train a protectionist spiral. --- The IMF already has a global reserve asset called the Special Drawing Rights: https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14...
- dragonwriter 6y ago
  > And while the Fed is independent, it’s certainly deeply intertwined with the US government. The Fed is…complicated. The Federal Reserve Board of Governors is an agency of the executive branch (an “independent” agency, but not independent of the government, independent within the government, like the FCC, FTC, and a number of other boards, commissions, etc.) The Federal Reserve System consists of a network of Federal Reserve Banks, each of which has a nine member board of directors, six of which are elected by member commercial banks, and three of which are selected by the Board of Governors. But the actual setting of monetary policy is done by the Federal Reserve Open Market Committee, which has 12 members — the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four of the other Federal Reserve Bank Presidents.

riffraff 6y ago

they hold them, receive payment, and redistribute it. There is a predetermined amount of the Fed dividends which gets payed to the constituent banks, and the rest is given back to the treasury. The same happens for the European Central Bank, and AFAICT, most central banks.

nerfhammer 6y ago

they hold the bonds. the fed has a balance sheet with whatever assets it holds. the fed just doesn't hold cash. any money it spends is created, any money paid to it ceases to exist. the fed buys bonds from the treasury department, which must slowly repay them as if the fed were any other bondholder. this provides a mechanism to reverse the creation of money, when bonds the fed holds are redeemed slightly more money than was created will be destroyed. Or they can destroy money by selling bonds on the open market earlier than that.