Why Does Federal Reserve Buy Treasuries?

Readers Question: Why does the federal reserve buy treasuries? Isn’t that just taking money from one pocket and putting it in another?

There are a few reasons the Federal Reserve is buying treasuries.

  1. With recession and falling velocity of circulation, the Money supply adjusted for velocity of circulation is showing deflation. Therefore buying Treasures and increasing money stock is reducing threat of deflation in US
  2. Buying US treasuries should in theory reduce interest rates on bonds. Lower bond rates should have an effect on boosting spending and investment in long run
  3. Makes it easier to sell enough treasuries to fill the nearly $2 trillion fiscal deficit.

It should be remembered creating money to buy US treasuries does nothing to create real output and there is a real risk of creating future inflation.

It can be seen as an unconventional form of monetary policy to try and deal with the unusually sharp decline in output and the much feared threat of deflation.

Updated post on Fed buying US Treasuries

More details see: Buying US Treasuries

4 thoughts on “Why Does Federal Reserve Buy Treasuries?”

  1. When the fed buys US treasury bills, it is backing the US dollar with assets that are themselves denominated in dollars. So if the dollar loses some value, then so will the bonds. This means there is less backing for the dollars, so they fall still more, etc.

    That explanation above about velocity, etc., is an uncritical application of the quantity theory of money, which unfortunately is the dominant theory of money.

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  2. of course will buy, It should be a guarantee for his money in the people – I mean bank money (you know what I mean) 🙂

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  3. According to Zero Hedge, countries outside of the U.S. dumped 74 billion dollars in U.S. Treasuries, most of it over the weekend:

    “Over the weekend, we observed the perplexing sell off of $56 billion in US Treasurys courtesy of weekly disclosure in the Fed’s custodial account (source: H.4.1) and speculated if this may be due to an asset rotation, under duress or otherwise, out of bonds and into stocks, to prevent the collapse of the global ponzi (because when the BRICs tell the IMF to boost its bailout capacity you know it is global). We also proposed a far simpler theory: “the dreaded D-day in which foreign official and private investors finally start offloading their $2.7 trillion in Treasurys with impunity (although not with the element of surprise – China has made it abundantly clear it will sell its Treasury holdings, the only question is when), has finally arrived.” In hindsight the Occam’s Razor should have been applied. Little did we know 5 short days ago just how violent the reaction by China would be (both post and pre-facto) to the Senate decision to propose a law for all out trade warfare with China. Now we know – in the week ended October 12, a further $17.7 billion was “removed” from the Fed’s custodial Treasury account, meaning that someone, somewhere is very displeased with US paper, and, far more importantly, what it represents, and wants to make their displeasure heard loud and clear. (Source)

    Undoubtedly, the Chinese and other countries have recently discovered that Italy and Greece, with smaller debt to income ratios than the United States, are less riskier and carry a higher rate of return. This is because, unlike the US, the Rothschild/Rockefeller bond rating agencies have trashed their country’s debt ratings, forcing them to pay a much higher interest rate than U.S. Treasuries. Hey, if you take the risk, you might as well earn the reward!

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