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Let's see if I understand this. My finance jargon skill is low. The Fed buys US treasury bonds for $XB, the treasury pays them the money plus interest, and the

Let's see if I understand this. My finance jargon skill is low. The Fed buys US treasury bonds for $XB, the treasury pays them the money plus interest, and the Fed then does nothing with the money? That sounds like a way to lower the money supply, which is exactly what I'd expect of a central bank trying to fight inflation.

fuoqi 3y ago
Until recently the Treasury was draining TGA, which was equivalent to doing QE. In other words, it was spending money which it got earlier from Fed by selling it treasuries. Now Fed does not buy treasuries anymore, so the Treasury has to refill TGA by attracting liquidity from the open market. It's equivalent to QT, which will be added to tightening performed by the Fed. Yes, it will lower money supply, but not without serious risks for the economy.
- cs702 3y ago
  Minor nitpicking: The Fed cannot buy bonds directly from the US Treasury. It can only buy them from third parties in the open market. Otherwise, you're right.
  - fuoqi 3y ago
    You are right, but I think that everyone understands that today it's nothing more than a formality which feeds those intermediate banks at the expense of taxpayers.
varispeed 3y ago
> That sounds like a way to lower the money supply, which is exactly what I'd expect of a central bank trying to fight inflation. Not the best idea if the problem with inflation is on the supply side - energy costs and so on, corporations have to find a way to cover these and the easiest way is to raise prices. Reduction of money supply will make fall in demand and those corporations will find it difficult to cover day to day - either they'll have to increase prices even more or go bankrupt. If they really wanted to fight inflation, they should have looked at easing supply side problems.
- dragontamer 3y ago
  The Fed Reserve is a giant bank. They literally have no production capability. What do you want them to do, turn into an oil company? The only thing the Fed Reserve can do is move interest rate policy and other indirect-means of controlling M2 money supply.
  - BurningFrog 3y ago
    Right. Congress and the President could do things like that. But since they have to win elections, their incentives are in the opposite direction. Which is why independent central banks were invented.
  - varispeed 3y ago
    Indeed, the Fed often seems like a Pavlov's dog, salivating at the sound of "inflation" and hastily raising interest rates. But as we all know, not every economic hiccup can be cured with the same medicine. Sometimes, it's more prudent to pass the baton to the government and let them address the root causes, rather than reflexively resorting to the same old monetary tricks.
    - dragontamer 3y ago
      > salivating at the sound of "inflation" and hastily raising interest rates Please name the times in the last 30 years where the Fed has hastily raised interest rates. Lemme help you out: https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS The majority of the Fed's actions has been to drop interest rates. > rather than reflexively resorting to the same old monetary tricks. The Fed can _only_ do monetary tricks. That's all they're authorized to do.
      - varispeed 3y ago
        Here is a better graph (although it does not contain recent data): https://www.gzeromedia.com/the-graphic-truth-50-years-of-us-inflation-vs-interest-rates https://www.gzeromedia.com/the-graphic-truth-50-years-of-us-... > The Fed can _only_ do monetary tricks. That's all they're authorized to do. When you only have a hammer, everything starts looking like a nail. Not everything can be solved by monetary tricks, but it seems like they just have to do something for the sake of it, regardless if that means tanking the economy. But hey, once economy dies, there will be no inflation! Genius.
ptero 3y ago
If you are interested in the macro situation in finance I cannot recommend Lyn Alden high enough. She wrote (among other things) a number of articles covering liquidity state, Fed and Treasury interplay, effects of TGA drawdown, etc.
bubbleRefuge 3y ago
The Fed does not target the monetary aggregates. Its impossible. They target interest rates, that is, the price of money, by buying and selling treasury securities and by paying interest on reserves. If they were to target monetary aggregates they would be unable to target interest rates.

fuoqi 3y ago

Until recently the Treasury was draining TGA, which was equivalent to doing QE. In other words, it was spending money which it got earlier from Fed by selling it treasuries. Now Fed does not buy treasuries anymore, so the Treasury has to refill TGA by attracting liquidity from the open market. It's equivalent to QT, which will be added to tightening performed by the Fed. Yes, it will lower money supply, but not without serious risks for the economy.

cs702 3y ago
Minor nitpicking: The Fed cannot buy bonds directly from the US Treasury. It can only buy them from third parties in the open market. Otherwise, you're right.
- fuoqi 3y ago
  You are right, but I think that everyone understands that today it's nothing more than a formality which feeds those intermediate banks at the expense of taxpayers.

varispeed 3y ago

> That sounds like a way to lower the money supply, which is exactly what I'd expect of a central bank trying to fight inflation. Not the best idea if the problem with inflation is on the supply side - energy costs and so on, corporations have to find a way to cover these and the easiest way is to raise prices. Reduction of money supply will make fall in demand and those corporations will find it difficult to cover day to day - either they'll have to increase prices even more or go bankrupt. If they really wanted to fight inflation, they should have looked at easing supply side problems.

dragontamer 3y ago
The Fed Reserve is a giant bank. They literally have no production capability. What do you want them to do, turn into an oil company? The only thing the Fed Reserve can do is move interest rate policy and other indirect-means of controlling M2 money supply.
- BurningFrog 3y ago
  Right. Congress and the President could do things like that. But since they have to win elections, their incentives are in the opposite direction. Which is why independent central banks were invented.
- varispeed 3y ago
  Indeed, the Fed often seems like a Pavlov's dog, salivating at the sound of "inflation" and hastily raising interest rates. But as we all know, not every economic hiccup can be cured with the same medicine. Sometimes, it's more prudent to pass the baton to the government and let them address the root causes, rather than reflexively resorting to the same old monetary tricks.
  - dragontamer 3y ago
    > salivating at the sound of "inflation" and hastily raising interest rates Please name the times in the last 30 years where the Fed has hastily raised interest rates. Lemme help you out: https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS The majority of the Fed's actions has been to drop interest rates. > rather than reflexively resorting to the same old monetary tricks. The Fed can _only_ do monetary tricks. That's all they're authorized to do.
    - varispeed 3y ago
      Here is a better graph (although it does not contain recent data): https://www.gzeromedia.com/the-graphic-truth-50-years-of-us-inflation-vs-interest-rates https://www.gzeromedia.com/the-graphic-truth-50-years-of-us-... > The Fed can _only_ do monetary tricks. That's all they're authorized to do. When you only have a hammer, everything starts looking like a nail. Not everything can be solved by monetary tricks, but it seems like they just have to do something for the sake of it, regardless if that means tanking the economy. But hey, once economy dies, there will be no inflation! Genius.

ptero 3y ago

If you are interested in the macro situation in finance I cannot recommend Lyn Alden high enough. She wrote (among other things) a number of articles covering liquidity state, Fed and Treasury interplay, effects of TGA drawdown, etc.

bubbleRefuge 3y ago

The Fed does not target the monetary aggregates. Its impossible. They target interest rates, that is, the price of money, by buying and selling treasury securities and by paying interest on reserves. If they were to target monetary aggregates they would be unable to target interest rates.