Since the beginning of the Great Recession, the Federal Reserve Bank has engaged in expansionary monetary policy (buying U.S. Treasury bonds) with the goal of promoting economic recovery. Most Americans think that when the Federal Reserve buys these securities, they must "get the money" from somewhere. Actually the Federal Reserve Bank has the perfect "money tree" because it is able to simply create "new money". That means it doesn’t actually need to have "the money" when it purchases securities. The Federal Reserve simply writes a check or does a wire transfer to the seller of the security. Very often, this is the U.S. Treasury who has just created new bonds in the deficit! At this point there is newly created money. No Federal Reserve account with "money in it" somewhere is decreased as a result of the bond purchases.
As children we were often reminded by parents, there is no money tree in the backyard. But that's not true if you are the Federal Reserve Bank. So how do they do it? It is called "quantitative easing" or simply QE.
Read the article and listen to the audio report below to learn more about QE. We will discuss our findings on the threads.
The Fed Warms up the Printing Press
Quantitative Easing, Explained
In this week's Discussion area, examine the following:
If the money supply continues to expand what does that eventually imply about inflation?