Describe to me how the Fed "pumps money into the economy," as they have been doing for the last few days.

Question

They're not just buying T-Bills right now, they are however pumping billions into a credit-crunched economy. How?

Clearly you people don't know what I'm asking... I don't care about your opinion, I want to know what the Fed does to get money into the economy.

Answer 1

Over the last few days the fed has been buying repurchase agreements (repos) in the overnight money markets with a large fraction of them for mortgage backed securities. By buying repos the fed adds money, that is liquidity, to the banks so they can settle their accounts at the end of the day as required by law. They have also made it clear that they stand ready to loan banks money directly, which is usually discouraged.

Note: A repurchase agreement is buying a security (bond) with an agreement that the seller will buy it back, usually the next business day.

Answer 2

The fed has three basic powers that effect the money supply -- since I have not seen the news stories I am not sure which of the three applies now.

First, the fed is a participant in the buying and selling of T-Bills. When the feds buy t-bills that puts money into the hands of the investors to spend on other things. When the fed sells T-Bills, they take that money out of the economy.

Second, the feds set the minimum reserve level for banks. Imagine that banks hold $1 trillion in reserve. At a 5% reserve level, they can lend $950 billion, but must keep on hand $50 billion. You lower the reserve level to 3% and the banks now can lend an extra $20 billion. Other than buying t-bills, this is the second easiest way to pump money into the economy.

The third thing that the fed does is loan money to banks that can't meet their reserve level. The interest that they charge is the reserve rate. When the feds lower the reserve rate, a bank can loan more money at cheaper rates and still cover their reserve requirement by borrowing from the fed at its cheaper rate. Because this mechanism is less direct, its less likely to be what the news media would discuss in terms of pumping money into the economy.

Answer 3

only Fed people HAVE extra money to do that

unfed folks just can't afford it

no really, the Federal Reserve Bank has TONS of power, they can ask the treasury to print money, also, its the bank that the banks go to when they are broke, to borrow some

Answer 4

Flooding the market with US Dollars.. the more dollars there are, the less our currency is worth...