Ask Terry Questions How Does Fed Add Money?

How Does Fed Add Money?

By Terry Savage on May 28, 2013 | Taxes & Economy

HOW DOES THE FED PUT MONEY IN THE STOCK MARKET ? I THOUGHT THAT THE FED CANNOT PURCHASE STOCKS, BUT IT CAN PURCHASE TREASURIES. IS THAT THE METHOD (TREASURIES) ?

SAVAGE SAYS: The Fed doesn’t add money directly to the stock market. It adds money to the banking system — and sometimes that money flows into stocks, instead of into loans make to companies and consumers.

The? market for Treasury securities?consists of?all the T-bills, notes, and bonds that the government sells to the public (and to brokers, and foreign central banks, and other investors). The Treasury borrows money by selling securities in the marketplace. There is a Treasury auction every week to sell new bills, notes and bonds — to borrow more money, and to refinance maturing debt.

The Fed goes into this government bond marketplace and BUYS existing Treasury securities (and more recently packages of mortgages) and pays for them with newly created credits on the books of the sellers, typically banks or dealers. The Fed simply “creates” that money to pay for the bonds it buys — thereby adding newly created credit to the banking system.

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