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The Fed operates like any other investor, except it gets to spend money that doesn't technically exist. This actually has worked out great for the Fed because d

The Fed operates like any other investor, except it gets to spend money that doesn't technically exist. This actually has worked out great for the Fed because despite creating money from thin air, the US economy has been growing so quickly that the assets they have bought using this thin-air money has increased in value. Now, with the economy slowing, inflation taking value out of investment vehicles, and interest rates being hiked, their assets are no longer increasing in value. This is just another window into the current inflation/interest crisis.

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darwinwhy 4y ago
When I think of an investor, I think of someone who picks and choses specific companies or sectors of the market to invest in. I'm curious what the Fed's tools allow it to invest in specific companies or sectors other than the economy as a whole. Can they get more targeted than an individual bank? Or is that the limit of their targeting power?
- lbotos 4y ago
  https://www.newyorkfed.org/markets/pomo_landing.html https://www.newyorkfed.org/markets/pomo_landing.html They have a trading desk. I can’t find the doc now but early pandemic there was some uproar that the desk started to buy “junk” aka things that weren’t worth the price paid.
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  - emkemp 4y ago
    The trading desk is not for investing by the Fed. That's for influencing interest rates based on inflation/deflation concerns and overall employment. Investors buy or sell securities to earn a profit. Not the Fed.
    - lbotos 4y ago
      The GP asked "how does the Fed go about buying things?" You are arguing that they don't meet the definition of an "investor" because they aren't "focused" on profit. To your point here's a graph of the Fed's profit they they've given to the Treasury since 2012: https://i0.wp.com/www.brookings.edu/wp-content/uploads/2022/06/fig1.png https://i0.wp.com/www.brookings.edu/wp-content/uploads/2022/... I'd argue that while the fed is not solely or primarily focused on profit, they very much do profit in their operations. That graphic comes from an article where some speculate what would happen if the fed didn't profit: https://www.brookings.edu/blog/up-front/2022/06/01/what-if-the-federal-reserve-books-losses-because-of-its-quantitative-easing/ https://www.brookings.edu/blog/up-front/2022/06/01/what-if-t... I think you got hung up on the word "investor" and missed GPs actual question "how does the fed buy?" From the page I linked: "The New York Fed's Open Market Trading Desk (the Desk) purchases agency MBS to sustain the smooth functioning of the agency MBS market, thereby fostering effective transmission of monetary policy to broader financial conditions." They have a group of people that are going into the open market and buying and selling. I dunno what those people are optimizing for in their purchases when it comes to MBS, but The Fed interact with "the market" exactly like others do in this case. And more specifically GP, https://www.investopedia.com/the-fed-s-corporate-bond-portfolio-5069989 https://www.investopedia.com/the-fed-s-corporate-bond-portfo... These are the companies the fed chose to buy in 2020 when Covid was peaking. And to be clear those were not purchased by the "trading desk" the Fed isolated those purchases into a separate entity which they called "SMCCF": https://www.investopedia.com/secondary-market-corporate-credit-facility-smccf-4800900 https://www.investopedia.com/secondary-market-corporate-cred... (The result is the same: some humans at "The Fed" went out into the market and selected some securities to purchase based on some criteria)
dmix 4y ago
One should assume that such a risk should be either baked in or avoided. But even if it was calculated it could still mean the Fed behaviour is disconnected from the reality of public markets which they ostensibly serve. It's a losing battle to fight this on some basis that these Fed/admin hires are just dumb villains and the whole scheme was poorly thought out by their well connected/educated revolving door who runs it. The fed propping up stuff like mortgages and Wall St bankers gambling then repeatedly using the financial might of the general US market to stabilize it in the short term doesn't necessarily mean the markets they manipulate (ostensibly for the public's benefit) is better off long term. But it does make rational sense when everyone these people speak to is losing their shirt in the short term, and the FUDy doomers come out in the obedient media to say there’s no other choice but propping up the last decade’s status quo. But once you start looking at historical interest rates, critical markets like mortgages/the many markets run by well connected pet oligopolies/etc, with all the subsequent risk glossed over via eliminating moral hazards... Ultimately critiquing the fed as if their economic structure is not well calculated is not the best strategy. Like a lot of more extreme political opinions the reality is much more boring and harder to confront if all you do is invent caricatures disconnected from reality. The enemy is much more informed and adaptable than some conspiring backroom dealing elite we all just need to expose and it will all be over. America’s historical stockpile of wealth and talent can be leaned on for only so long… just like Russia leaning on their Soviet arms stockpile the first time they confront a real threat (aka themselves).
christkv 4y ago
The fed buys bonds right so they are getting the same rate squeeze as everyone with other bonds?

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darwinwhy 4y ago

When I think of an investor, I think of someone who picks and choses specific companies or sectors of the market to invest in. I'm curious what the Fed's tools allow it to invest in specific companies or sectors other than the economy as a whole. Can they get more targeted than an individual bank? Or is that the limit of their targeting power?

lbotos 4y ago
https://www.newyorkfed.org/markets/pomo_landing.html https://www.newyorkfed.org/markets/pomo_landing.html They have a trading desk. I can’t find the doc now but early pandemic there was some uproar that the desk started to buy “junk” aka things that weren’t worth the price paid.
- deleted 4y ago
  [deleted]
- deleted 4y ago
  [deleted]
- emkemp 4y ago
  The trading desk is not for investing by the Fed. That's for influencing interest rates based on inflation/deflation concerns and overall employment. Investors buy or sell securities to earn a profit. Not the Fed.
  - lbotos 4y ago
    The GP asked "how does the Fed go about buying things?" You are arguing that they don't meet the definition of an "investor" because they aren't "focused" on profit. To your point here's a graph of the Fed's profit they they've given to the Treasury since 2012: https://i0.wp.com/www.brookings.edu/wp-content/uploads/2022/06/fig1.png https://i0.wp.com/www.brookings.edu/wp-content/uploads/2022/... I'd argue that while the fed is not solely or primarily focused on profit, they very much do profit in their operations. That graphic comes from an article where some speculate what would happen if the fed didn't profit: https://www.brookings.edu/blog/up-front/2022/06/01/what-if-the-federal-reserve-books-losses-because-of-its-quantitative-easing/ https://www.brookings.edu/blog/up-front/2022/06/01/what-if-t... I think you got hung up on the word "investor" and missed GPs actual question "how does the fed buy?" From the page I linked: "The New York Fed's Open Market Trading Desk (the Desk) purchases agency MBS to sustain the smooth functioning of the agency MBS market, thereby fostering effective transmission of monetary policy to broader financial conditions." They have a group of people that are going into the open market and buying and selling. I dunno what those people are optimizing for in their purchases when it comes to MBS, but The Fed interact with "the market" exactly like others do in this case. And more specifically GP, https://www.investopedia.com/the-fed-s-corporate-bond-portfolio-5069989 https://www.investopedia.com/the-fed-s-corporate-bond-portfo... These are the companies the fed chose to buy in 2020 when Covid was peaking. And to be clear those were not purchased by the "trading desk" the Fed isolated those purchases into a separate entity which they called "SMCCF": https://www.investopedia.com/secondary-market-corporate-credit-facility-smccf-4800900 https://www.investopedia.com/secondary-market-corporate-cred... (The result is the same: some humans at "The Fed" went out into the market and selected some securities to purchase based on some criteria)

dmix 4y ago

One should assume that such a risk should be either baked in or avoided. But even if it was calculated it could still mean the Fed behaviour is disconnected from the reality of public markets which they ostensibly serve. It's a losing battle to fight this on some basis that these Fed/admin hires are just dumb villains and the whole scheme was poorly thought out by their well connected/educated revolving door who runs it. The fed propping up stuff like mortgages and Wall St bankers gambling then repeatedly using the financial might of the general US market to stabilize it in the short term doesn't necessarily mean the markets they manipulate (ostensibly for the public's benefit) is better off long term. But it does make rational sense when everyone these people speak to is losing their shirt in the short term, and the FUDy doomers come out in the obedient media to say there’s no other choice but propping up the last decade’s status quo. But once you start looking at historical interest rates, critical markets like mortgages/the many markets run by well connected pet oligopolies/etc, with all the subsequent risk glossed over via eliminating moral hazards... Ultimately critiquing the fed as if their economic structure is not well calculated is not the best strategy. Like a lot of more extreme political opinions the reality is much more boring and harder to confront if all you do is invent caricatures disconnected from reality. The enemy is much more informed and adaptable than some conspiring backroom dealing elite we all just need to expose and it will all be over. America’s historical stockpile of wealth and talent can be leaned on for only so long… just like Russia leaning on their Soviet arms stockpile the first time they confront a real threat (aka themselves).

christkv 4y ago

The fed buys bonds right so they are getting the same rate squeeze as everyone with other bonds?