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Reading my answer after posting, I think your confusion is really coming from the way bond pricing works, not anything to do with central banking. The price of

Reading my answer after posting, I think your confusion is really coming from the way bond pricing works, not anything to do with central banking. The price of a bond is determined by a pretty simple formula, P = M / (1 + i)^n, where P is the market price, M is the redemption value at maturity, i is the interest rate per period, and n is the number of periods at which interest is paid. Since interest rate is in the denominator, this means a higher interest rate bond has a lower market value and vice versa. Thus, boosting the market value of a US Treasury instrument by buying them decreases the interest rate they need to offer to sell them. But, boosting the market rate also increases the capital gains of current owners of the bonds who sell them to you. The "yield" on a bond is only fully determined by the interest rate if you actually hold it to maturity. Some of the mechanisms at play here overlap with cryptocurrencies, but a lot of them don't. Cryptocurrencies have no maturity value or coupon payments, so the yield on holding them is entirely determined by capital gains. Nothing else. This isn't the same thing as an "interest rate" in the sense that it means with bonds. The Fed is decreasing the interest rate of new Treasury offerings, but also increasing the capital gains of current owners of Treasuries. So the interest rate decrease is a bad thing for people who want to buy new debt, but a good thing for holders of current debt.

colinsane 4y ago
> The Fed doesn't offer anyone yield on holding dollars. You get yield from holding treasuries and interbank commercial paper. The Fed influences the yield on these instruments by buying and selling them using a theoretically infinite supply of its own dollars. i think my understanding of bond pricing is adequate. what i don't understand is how much of this yield (from treasuries, commercial paper) is achieved by simply increasing the money supply in the future -- regardless of which entity actually does that -- v.s. coming from an external source. a few hypotheticals -- based on my understanding -- for the case where none of this yield comes from commercial paper: 1. after 24 years of 3% rates, the money supply's doubled. 2. after 24 years of 3% rates, the money supply's been kept constant by levying a tax equivalent to the original money supply. in the former, nobody should care what the rate is: it's a nominal metric completely detached from anything "real". in the latter, the rate is meaningful because it's attached to something that's redistributive. introducing commercial paper: i guess this is where rates (coupled with reserve requirements) could contract the supply. if banks generally borrow more from the fed than they lend to it, then higher rates would decrease the supply over time. if the opposite, then raising rates temporarily decreases the money in circulation but inflates the supply over time. if the goal is to tighten supply, then i don't understand why the fed would ever borrow from banks, since that liability forces an increased supply in the long run. it would make more sense to me to decrease supply simply by increasing reserve requirements. but anyway, this is a complicated enough interaction for me brain that i just wish there were guides out there that set out to show the far-reaching effects of fed rates.

colinsane 4y ago

> The Fed doesn't offer anyone yield on holding dollars. You get yield from holding treasuries and interbank commercial paper. The Fed influences the yield on these instruments by buying and selling them using a theoretically infinite supply of its own dollars. i think my understanding of bond pricing is adequate. what i don't understand is how much of this yield (from treasuries, commercial paper) is achieved by simply increasing the money supply in the future -- regardless of which entity actually does that -- v.s. coming from an external source. a few hypotheticals -- based on my understanding -- for the case where none of this yield comes from commercial paper: 1. after 24 years of 3% rates, the money supply's doubled. 2. after 24 years of 3% rates, the money supply's been kept constant by levying a tax equivalent to the original money supply. in the former, nobody should care what the rate is: it's a nominal metric completely detached from anything "real". in the latter, the rate is meaningful because it's attached to something that's redistributive. introducing commercial paper: i guess this is where rates (coupled with reserve requirements) could contract the supply. if banks generally borrow more from the fed than they lend to it, then higher rates would decrease the supply over time. if the opposite, then raising rates temporarily decreases the money in circulation but inflates the supply over time. if the goal is to tighten supply, then i don't understand why the fed would ever borrow from banks, since that liability forces an increased supply in the long run. it would make more sense to me to decrease supply simply by increasing reserve requirements. but anyway, this is a complicated enough interaction for me brain that i just wish there were guides out there that set out to show the far-reaching effects of fed rates.