When Fed "puts money" into the economy, exactly where does it go?

Question

I recently heard that the Fed put additional (billions?) money into the eccomoy to strengthen things in the face of worries over the stock market and mortgage lending troubles.

When they put this money "in" exactly where is it going? Someone or something must be recieveing it correct? Money is what we exchange for goods and services, so the reciever must have provided something that they are recieving money in exchange for?

Scott

Answer 1

It doesn't mean they are giving it away or anything like that. It means they are printing more currency to be placed into circulation. the amount of printed currency in circulation affects the economy...in sort of a supply & demand way.

Answer 2

I don't think any of the previous answers are entirely correct. The Fed is the only institution in the country that can write a check to buy something without having any money in the bank. This is because every bank is required to hold reserves with the Fed equal to a proportion of their outstanding loans. When the Fed writes a check to buy, for example, office furniture, the seller of the furniture deposits the check in his bank account. His bank then gives the check to the Fed for payment. The Fed then simply declares that the banks reserves with the Fed are increased by the amount of the check.

The bank now has more reserves than it is legally required to hold. It can then use this excess reserves to make a loan. It does not matter what the Fed buys. It could be anything but generally the Fed buys government bonds.

This increase in bank reserves encourages them to make more loans. In a financial panic, banks and other lenders get nervous and became very cautious about making new loans. This can be a serious problem for borrowers such as a company who needs the loan for working capital. The company may then be forced to reduce production which may cause it to default on other loans. This then further reduces the willingness of lenders to make more loans leading to a vicious downward spiral.

Answer 3

The FED, through its open market operations creates (prints) dollars which are used to repurchase government bonds previously sold. This is what happened on Thursday and Friday of last week when early signs of financial collapse were sounded as the US stock markets and stock markets around the world reacted to the sub prime and prime mortgage melt down. To ease investor fears, The FED created over 70 billion dollars. Around the world, over 300 billion dollars was injected in the 2 day period.

The long and short of it all is that the American people are being screwed to protect the interests of failing hedge funds, tottering financial institutions and desperate mortgage bankers.

This entire process is a double whammy to the millions of Americans who got caught up in the sub prime or prime mortgage mess. Not only will many of us lose homes, but all of us will lose savings and income in the turbulent inflationary period soon to come. We need to wake up and seize control before our politicians, our government and big business totally destroy the common persons prospects for any future economic hope!

Answer 4

Raising taxes and high interest rates have more to do with the economy than most things do. A promise made by the dems if they take control next year has put businesses in a wait and see attitude.

Answer 5

If I remember correctly, they buy back bonds that were sold to people and organizations when the Fed takes money out of the economy. It means that there is more cash available to keep interest rates low, debt cheap to own, and investments easier to make.

The flip side is that the increase of money may lead to a rise in inflation if it isn't done carefully.

Answer 6

They buy back part of the public debt, whomever owned that debt gets the money. The Federal Government then pays the Fed back at maturity. The holders of the debt either reinvest it or consume it. Either way, it ends up back in the economy.

Answer 7

It is made available to banks at a low rate who then loan it out to other people.

Answer 8

Banks for people to borrow.