BUYING ASSETS – The Fed is projected to buy $3.5 trillion in Treasury securities by 12/31/20. Technically, the Fed does not buy Treasuries directly from the government, but rather it buys previously issued Treasury securities from 21 “primary dealers,” i.e., commercial banks and brokerage houses that are trading counterparties of the New York Federal Reserve
HE SAID IT – Scott Pelley of “60 Minutes” asked Fed Chair Jay Powell on 5/17/20 “where does it (the new money flooding our system) come from?” Powell responded “We print it digitally. So as a central bank, we have the ability to create money digitally. And that actually increases the money supply.
WHERE IT COMES FROM – The money used by the Federal Reserve in its lending programs and asset-buying programs was “digitally created” by the Fed, i.e., the Fed does not technically “print” money (it does not have a printing press) but rather it creates money with the press of a button on a keyboard. The Fed is forecasted to create $5 trillion of new money between March 2020 and December 2020.
MONEY MULTIPLIER – When the Fed acquires assets from banks, e.g., Treasury securities, the Fed issues electronic credits to the banks in exchange for the assets. Banks can then use the money from the asset sale to make loans equal to 10 times the amount of money digitally created by the Fed.
GETTING A LOT BIGGER – The Fed’s balance sheet reached $6.14 trillion as of 6/24/20, up from $3.89 trillion as of 3/11/20, largely the result of purchases of Treasury securities.
USED ONE OTHER TIME – The Fed has “digitally created” money to buy government securities once before – during the 2008 global real estate crisis. Between 11/05/08 and 10/29/14, the Fed’s balance sheet grew from $490 billion to $4.2 trillion as a result of 3 “Quantitative Easing” programs.
LOW COST – The 2008-14 “Quantitative Easing” programs were designed to lower long-term rates for mortgages and other debt after the nation’s 2008-09 recession. It worked – the yield on the 10-year Treasury note and the average interest rate on a 30-year fixed rate mortgage both fell to all-time lows in 2012.
MONEY SUPPLY – The nation’s money supply (M1) has increase from $3.73 trillion as of 3/11/20 to $5.23 trillion as of 6/15/20, a function of the Fed’s “digital creation” of money and of low interest rates motivating consumers to borrow money at historically low rates.
Courtesy of Mortgage Market Guide and the Federal Reserve
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