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If the Fed "loses" money by buying high and selling low, it means dollars have been created with no mechanism by which they can be retired, because the Fed has
by Areading314 4y ago
If the Fed "loses" money by buying high and selling low, it means dollars have been created with no mechanism by which they can be retired, because the Fed has no corresponding assets they could use to exchange them for. This creates permanent inflation/dilution of the currency.
- JumpCrisscross 4y ago> dollars have been created with no mechanism by which they can be retired, because the Fed has no corresponding assets they could use to exchange them for Open market operations are one among many of the Fed's policy tools [1]. [1] https://www.frbsf.org/education/teacher-resources/what-is-the-fed/monetary-policy/ https://www.frbsf.org/education/teacher-resources/what-is-th...
- qeternity 4y agoThese are debt instruments. If the Fed buys UST, MBS, etc from the market, those assets will be serviced over time and the money will return to the Fed.
- JumpCrisscross 4y ago> those assets will be serviced over time and the money will return to the Fed The comment I responded to [1] posited the Fed needing to engage in extraordinary tightening. Waiting for the debt to be repaid would be insufficient in that case. (Also, defaults unbalance the equation.) In that case, the Fed would need to sell assets to draw cash out of the economy. My point was that if the Fed ran its balance sheet to zero, it would still have unlimited firepower in the form of slashing interest on reserves through zero, borrowing through repos and potentially even raising the reserve requirement. These are powerful tools. Too powerful for regular use, which is why the more-precise open market operations are preferred. TL; DR Running out of room to tighten is not a problem for a central bank. [1] https://news.ycombinator.com/item?id=31428385 https://news.ycombinator.com/item?id=31428385