Fed Quantitative Easing: interested in details
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Fed Quantitative Easing: interested in details
So the Federal Reserve bought lots of Treasury bonds. Basically using the Country’s own money to purchase it’s own debt? I can’t even figure out how this works. The other type of debt they purchases is mortgage backed securities, correct? Both govt and commercial? Did they just buy what was already being traded or purchase new issues? Did they buy any other kind of debt? Is it all investment grade? Seems to be a lot of mystery and not much talk about what they have actually done. I am very curious and just looking for some answers to satisfy it. Figure some of you are well versed on these matters and can provide some answers. TIA
Re: Fed Quantitative Easing: interested in details
Ben Felix addresses this: https://youtu.be/K3lP3BhvnSoChinchillaWhiplash wrote: ↑Wed Jan 19, 2022 6:50 pm So the Federal Reserve bought lots of Treasury bonds. Basically using the Country’s own money to purchase it’s own debt? I can’t even figure out how this works. The other type of debt they purchases is mortgage backed securities, correct? Both govt and commercial? Did they just buy what was already being traded or purchase new issues? Did they buy any other kind of debt? Is it all investment grade? Seems to be a lot of mystery and not much talk about what they have actually done. I am very curious and just looking for some answers to satisfy it. Figure some of you are well versed on these matters and can provide some answers. TIA
Re: Fed Quantitative Easing: interested in details
I came into this thread ready to link that video too. Great simplified explainer video!exodusNH wrote: ↑Wed Jan 19, 2022 6:53 pmBen Felix addresses this: https://youtu.be/K3lP3BhvnSoChinchillaWhiplash wrote: ↑Wed Jan 19, 2022 6:50 pm So the Federal Reserve bought lots of Treasury bonds. Basically using the Country’s own money to purchase it’s own debt? I can’t even figure out how this works. The other type of debt they purchases is mortgage backed securities, correct? Both govt and commercial? Did they just buy what was already being traded or purchase new issues? Did they buy any other kind of debt? Is it all investment grade? Seems to be a lot of mystery and not much talk about what they have actually done. I am very curious and just looking for some answers to satisfy it. Figure some of you are well versed on these matters and can provide some answers. TIA
Re: Fed Quantitative Easing: interested in details
The whole notion of private banks creating money with loans was such a surprise. Back when I learned this stuff in 9th or 10th grade, it was all about fractional reserve banking.sarabayo wrote: ↑Wed Jan 19, 2022 6:55 pmI came into this thread ready to link that video too. Great simplified explainer video!exodusNH wrote: ↑Wed Jan 19, 2022 6:53 pmBen Felix addresses this: https://youtu.be/K3lP3BhvnSoChinchillaWhiplash wrote: ↑Wed Jan 19, 2022 6:50 pm So the Federal Reserve bought lots of Treasury bonds. Basically using the Country’s own money to purchase it’s own debt? I can’t even figure out how this works. The other type of debt they purchases is mortgage backed securities, correct? Both govt and commercial? Did they just buy what was already being traded or purchase new issues? Did they buy any other kind of debt? Is it all investment grade? Seems to be a lot of mystery and not much talk about what they have actually done. I am very curious and just looking for some answers to satisfy it. Figure some of you are well versed on these matters and can provide some answers. TIA
Re: Fed Quantitative Easing: interested in details
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Re: Fed Quantitative Easing: interested in details
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Re: Fed Quantitative Easing: interested in details
I've read the Fed owns 25% of TIPS. See Twitter link for charts and more info. Interesting, perhaps, but I don't see how it's actionable.
Re: Fed Quantitative Easing: interested in details
Thanks that was a really useful video but there's something I don't understand.exodusNH wrote: ↑Wed Jan 19, 2022 6:53 pmBen Felix addresses this: https://youtu.be/K3lP3BhvnSoChinchillaWhiplash wrote: ↑Wed Jan 19, 2022 6:50 pm So the Federal Reserve bought lots of Treasury bonds. Basically using the Country’s own money to purchase it’s own debt? I can’t even figure out how this works. The other type of debt they purchases is mortgage backed securities, correct? Both govt and commercial? Did they just buy what was already being traded or purchase new issues? Did they buy any other kind of debt? Is it all investment grade? Seems to be a lot of mystery and not much talk about what they have actually done. I am very curious and just looking for some answers to satisfy it. Figure some of you are well versed on these matters and can provide some answers. TIA
If the banks cannot "lend out" the excess reserves from the proceeds of QE, then why does the bank even sell the bonds to the Fed in the first place? The banks can just sell the bonds directly in the market if it didn't want them. In other words, what is the mechanism that encourages banks to buy up the assets that the Fed wants to buy when it is quantitatively easing? Is it because the Fed will pay an interest on excess reserves that is greater than the overnight rate?
Re: Fed Quantitative Easing: interested in details
The US Treasury market is the deepest, most liquid market in the world. It does something like half a trillion dollars in volume daily. The Fed's asset purchase are a tiny fraction of that and typically it's not going to have a problem finding counterparties who are selling. If it was the case that the Fed's demand for Treasuries outstripped supply the price of Treasuries would have to increase to induce more sellersDry-Drink wrote: ↑Thu Jan 20, 2022 12:55 pmThanks that was a really useful video but there's something I don't understand.exodusNH wrote: ↑Wed Jan 19, 2022 6:53 pmBen Felix addresses this: https://youtu.be/K3lP3BhvnSoChinchillaWhiplash wrote: ↑Wed Jan 19, 2022 6:50 pm So the Federal Reserve bought lots of Treasury bonds. Basically using the Country’s own money to purchase it’s own debt? I can’t even figure out how this works. The other type of debt they purchases is mortgage backed securities, correct? Both govt and commercial? Did they just buy what was already being traded or purchase new issues? Did they buy any other kind of debt? Is it all investment grade? Seems to be a lot of mystery and not much talk about what they have actually done. I am very curious and just looking for some answers to satisfy it. Figure some of you are well versed on these matters and can provide some answers. TIA
If the banks cannot "lend out" the excess reserves from the proceeds of QE, then why does the bank even sell the bonds to the Fed in the first place? The banks can just sell the bonds directly in the market if it didn't want them. In other words, what is the mechanism that encourages banks to buy up the assets that the Fed wants to buy when it is quantitatively easing? Is it because the Fed will pay an interest on excess reserves that is greater than the overnight rate?
Re: Fed Quantitative Easing: interested in details
Sorry maybe I'm a little dense but I don't understand how your response answers my question: Why would a bank sell the asset to the Fed in exchange for bank reserves when banks don't need bank reserves to function and those bank reserves cannot be used for anything by the bank?km91 wrote: ↑Thu Jan 20, 2022 1:11 pmThe US Treasury market is the deepest, most liquid market in the world. It does something like half a trillion dollars in volume daily. The Fed's asset purchase are a tiny fraction of that and typically it's not going to have a problem finding counterparties who are selling. If it was the case that the Fed's demand for Treasuries outstripped supply the price of Treasuries would have to increase to induce more sellersDry-Drink wrote: ↑Thu Jan 20, 2022 12:55 pmThanks that was a really useful video but there's something I don't understand.exodusNH wrote: ↑Wed Jan 19, 2022 6:53 pmBen Felix addresses this: https://youtu.be/K3lP3BhvnSoChinchillaWhiplash wrote: ↑Wed Jan 19, 2022 6:50 pm So the Federal Reserve bought lots of Treasury bonds. Basically using the Country’s own money to purchase it’s own debt? I can’t even figure out how this works. The other type of debt they purchases is mortgage backed securities, correct? Both govt and commercial? Did they just buy what was already being traded or purchase new issues? Did they buy any other kind of debt? Is it all investment grade? Seems to be a lot of mystery and not much talk about what they have actually done. I am very curious and just looking for some answers to satisfy it. Figure some of you are well versed on these matters and can provide some answers. TIA
If the banks cannot "lend out" the excess reserves from the proceeds of QE, then why does the bank even sell the bonds to the Fed in the first place? The banks can just sell the bonds directly in the market if it didn't want them. In other words, what is the mechanism that encourages banks to buy up the assets that the Fed wants to buy when it is quantitatively easing? Is it because the Fed will pay an interest on excess reserves that is greater than the overnight rate?
If it were a Fractional Reserve system, or if the Fed paid with actual cash that the bank can then in turn use, then I get it. Is there a mechanism by which a bank can trade their excess reserves for capital that they can then use to buy assets or make investments?
Re: Fed Quantitative Easing: interested in details
Basically using the Country’s own money to purchase it’s own debt?
Or you could think of it as the government removing some of its already-issued non-transferable debt (treasuries) from the economy and replacing it with newly-issued transferable debt (dollars).
The other type of debt they purchases is mortgage backed securities, correct?
Yes, now, but not typically.
Both govt and commercial?
Only government guaranteed.
Did they just buy what was already being traded or purchase new issues?
Just already issued.
Did they buy any other kind of debt?
They did in 2020 as part of their covid response.
Is it all investment grade?
Now it is all risk free. In 2020 some of it was risky but the Treasury was on the hook for the first losses.
Seems to be a lot of mystery and not much talk about what they have actually done.
No mystery. Most of the boring details of what they actually do are in links on this page.
https://www.newyorkfed.org/markets/dome ... ementation
Details on their covid programs are
https://www.newyorkfed.org/markets/new- ... o-covid-19
and here.
https://www.federalreserve.gov/publicat ... vid-19.htm
then why does the bank even sell the bonds to the Fed in the first place?
The Fed does not buy bonds directly from banks. They buy them on the open market though a group of major broker-dealers.
Ron
Or you could think of it as the government removing some of its already-issued non-transferable debt (treasuries) from the economy and replacing it with newly-issued transferable debt (dollars).
The other type of debt they purchases is mortgage backed securities, correct?
Yes, now, but not typically.
Both govt and commercial?
Only government guaranteed.
Did they just buy what was already being traded or purchase new issues?
Just already issued.
Did they buy any other kind of debt?
They did in 2020 as part of their covid response.
Is it all investment grade?
Now it is all risk free. In 2020 some of it was risky but the Treasury was on the hook for the first losses.
Seems to be a lot of mystery and not much talk about what they have actually done.
No mystery. Most of the boring details of what they actually do are in links on this page.
https://www.newyorkfed.org/markets/dome ... ementation
Details on their covid programs are
https://www.newyorkfed.org/markets/new- ... o-covid-19
and here.
https://www.federalreserve.gov/publicat ... vid-19.htm
then why does the bank even sell the bonds to the Fed in the first place?
The Fed does not buy bonds directly from banks. They buy them on the open market though a group of major broker-dealers.
Ron
Money is fungible |
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Re: Fed Quantitative Easing: interested in details
Banks aren't the only players in the Treasury market. It could be pension or an insurance company selling to pay out benefits, or institutional money managers selling to rebalance their asset allocationDry-Drink wrote: ↑Thu Jan 20, 2022 1:56 pmSorry maybe I'm a little dense but I don't understand how your response answers my question: Why would a bank sell the asset to the Fed in exchange for bank reserves when banks don't need bank reserves to function and those bank reserves cannot be used for anything by the bank?km91 wrote: ↑Thu Jan 20, 2022 1:11 pmThe US Treasury market is the deepest, most liquid market in the world. It does something like half a trillion dollars in volume daily. The Fed's asset purchase are a tiny fraction of that and typically it's not going to have a problem finding counterparties who are selling. If it was the case that the Fed's demand for Treasuries outstripped supply the price of Treasuries would have to increase to induce more sellersDry-Drink wrote: ↑Thu Jan 20, 2022 12:55 pmThanks that was a really useful video but there's something I don't understand.exodusNH wrote: ↑Wed Jan 19, 2022 6:53 pmBen Felix addresses this: https://youtu.be/K3lP3BhvnSoChinchillaWhiplash wrote: ↑Wed Jan 19, 2022 6:50 pm So the Federal Reserve bought lots of Treasury bonds. Basically using the Country’s own money to purchase it’s own debt? I can’t even figure out how this works. The other type of debt they purchases is mortgage backed securities, correct? Both govt and commercial? Did they just buy what was already being traded or purchase new issues? Did they buy any other kind of debt? Is it all investment grade? Seems to be a lot of mystery and not much talk about what they have actually done. I am very curious and just looking for some answers to satisfy it. Figure some of you are well versed on these matters and can provide some answers. TIA
If the banks cannot "lend out" the excess reserves from the proceeds of QE, then why does the bank even sell the bonds to the Fed in the first place? The banks can just sell the bonds directly in the market if it didn't want them. In other words, what is the mechanism that encourages banks to buy up the assets that the Fed wants to buy when it is quantitatively easing? Is it because the Fed will pay an interest on excess reserves that is greater than the overnight rate?
If it were a Fractional Reserve system, or if the Fed paid with actual cash that the bank can then in turn use, then I get it. Is there a mechanism by which a bank can trade their excess reserves for capital that they can then use to buy assets or make investments?
Re: Fed Quantitative Easing: interested in details
Ok but the Fed can't buy the assets from those, only banks right?km91 wrote: ↑Thu Jan 20, 2022 8:42 pmBanks aren't the only players in the Treasury market. It could be pension or an insurance company selling to pay out benefits, or institutional money managers selling to rebalance their asset allocationDry-Drink wrote: ↑Thu Jan 20, 2022 1:56 pmSorry maybe I'm a little dense but I don't understand how your response answers my question: Why would a bank sell the asset to the Fed in exchange for bank reserves when banks don't need bank reserves to function and those bank reserves cannot be used for anything by the bank?km91 wrote: ↑Thu Jan 20, 2022 1:11 pmThe US Treasury market is the deepest, most liquid market in the world. It does something like half a trillion dollars in volume daily. The Fed's asset purchase are a tiny fraction of that and typically it's not going to have a problem finding counterparties who are selling. If it was the case that the Fed's demand for Treasuries outstripped supply the price of Treasuries would have to increase to induce more sellersDry-Drink wrote: ↑Thu Jan 20, 2022 12:55 pmThanks that was a really useful video but there's something I don't understand.
If the banks cannot "lend out" the excess reserves from the proceeds of QE, then why does the bank even sell the bonds to the Fed in the first place? The banks can just sell the bonds directly in the market if it didn't want them. In other words, what is the mechanism that encourages banks to buy up the assets that the Fed wants to buy when it is quantitatively easing? Is it because the Fed will pay an interest on excess reserves that is greater than the overnight rate?
If it were a Fractional Reserve system, or if the Fed paid with actual cash that the bank can then in turn use, then I get it. Is there a mechanism by which a bank can trade their excess reserves for capital that they can then use to buy assets or make investments?
Re: Fed Quantitative Easing: interested in details
A good book on this subject https://www.amazon.com/Lords-Easy-Money ... pons&psc=1
“Every deduction is allowed as a matter of legislative grace.” US Federal Court
Re: Fed Quantitative Easing: interested in details
The Fed only transacts with designated counterparties called primary dealers, which I believe are all banks. The primary dealers would broker the trade for the Fed, buying Treasuries in the market and selling to the FedDry-Drink wrote: ↑Thu Jan 20, 2022 8:45 pmOk but the Fed can't buy the assets from those, only banks right?km91 wrote: ↑Thu Jan 20, 2022 8:42 pmBanks aren't the only players in the Treasury market. It could be pension or an insurance company selling to pay out benefits, or institutional money managers selling to rebalance their asset allocationDry-Drink wrote: ↑Thu Jan 20, 2022 1:56 pmSorry maybe I'm a little dense but I don't understand how your response answers my question: Why would a bank sell the asset to the Fed in exchange for bank reserves when banks don't need bank reserves to function and those bank reserves cannot be used for anything by the bank?km91 wrote: ↑Thu Jan 20, 2022 1:11 pmThe US Treasury market is the deepest, most liquid market in the world. It does something like half a trillion dollars in volume daily. The Fed's asset purchase are a tiny fraction of that and typically it's not going to have a problem finding counterparties who are selling. If it was the case that the Fed's demand for Treasuries outstripped supply the price of Treasuries would have to increase to induce more sellersDry-Drink wrote: ↑Thu Jan 20, 2022 12:55 pm
Thanks that was a really useful video but there's something I don't understand.
If the banks cannot "lend out" the excess reserves from the proceeds of QE, then why does the bank even sell the bonds to the Fed in the first place? The banks can just sell the bonds directly in the market if it didn't want them. In other words, what is the mechanism that encourages banks to buy up the assets that the Fed wants to buy when it is quantitatively easing? Is it because the Fed will pay an interest on excess reserves that is greater than the overnight rate?
If it were a Fractional Reserve system, or if the Fed paid with actual cash that the bank can then in turn use, then I get it. Is there a mechanism by which a bank can trade their excess reserves for capital that they can then use to buy assets or make investments?
Re: Fed Quantitative Easing: interested in details
However, banks need reserves to settle flows with other banks.Dry-Drink wrote: ↑Thu Jan 20, 2022 1:56 pmSorry maybe I'm a little dense but I don't understand how your response answers my question: Why would a bank sell the asset to the Fed in exchange for bank reserves when banks don't need bank reserves to function and those bank reserves cannot be used for anything by the bank?km91 wrote: ↑Thu Jan 20, 2022 1:11 pmThe US Treasury market is the deepest, most liquid market in the world. It does something like half a trillion dollars in volume daily. The Fed's asset purchase are a tiny fraction of that and typically it's not going to have a problem finding counterparties who are selling. If it was the case that the Fed's demand for Treasuries outstripped supply the price of Treasuries would have to increase to induce more sellersDry-Drink wrote: ↑Thu Jan 20, 2022 12:55 pmThanks that was a really useful video but there's something I don't understand.exodusNH wrote: ↑Wed Jan 19, 2022 6:53 pmBen Felix addresses this: https://youtu.be/K3lP3BhvnSoChinchillaWhiplash wrote: ↑Wed Jan 19, 2022 6:50 pm So the Federal Reserve bought lots of Treasury bonds. Basically using the Country’s own money to purchase it’s own debt? I can’t even figure out how this works. The other type of debt they purchases is mortgage backed securities, correct? Both govt and commercial? Did they just buy what was already being traded or purchase new issues? Did they buy any other kind of debt? Is it all investment grade? Seems to be a lot of mystery and not much talk about what they have actually done. I am very curious and just looking for some answers to satisfy it. Figure some of you are well versed on these matters and can provide some answers. TIA
If the banks cannot "lend out" the excess reserves from the proceeds of QE, then why does the bank even sell the bonds to the Fed in the first place? The banks can just sell the bonds directly in the market if it didn't want them. In other words, what is the mechanism that encourages banks to buy up the assets that the Fed wants to buy when it is quantitatively easing? Is it because the Fed will pay an interest on excess reserves that is greater than the overnight rate?
If it were a Fractional Reserve system, or if the Fed paid with actual cash that the bank can then in turn use, then I get it. Is there a mechanism by which a bank can trade their excess reserves for capital that they can then use to buy assets or make investments?
I don't know why the banks would want to sell to the Fed instead of the market. My assumption -- based on no research -- is that they can get the Treasuries back at the price they sold them for rather than having to deal with the market fluctuations. I assume that it's also a faster process than whatever typical market settlements would be.
The Fed is also a willing buyer. In times of crisis, everyone is trying to get cash. It may not be possible to offload them into the market.
Re: Fed Quantitative Easing: interested in details
I'm going to have to watch that video like 10 times.exodusNH wrote: ↑Wed Jan 19, 2022 6:53 pmBen Felix addresses this: https://youtu.be/K3lP3BhvnSoChinchillaWhiplash wrote: ↑Wed Jan 19, 2022 6:50 pm So the Federal Reserve bought lots of Treasury bonds. Basically using the Country’s own money to purchase it’s own debt? I can’t even figure out how this works. The other type of debt they purchases is mortgage backed securities, correct? Both govt and commercial? Did they just buy what was already being traded or purchase new issues? Did they buy any other kind of debt? Is it all investment grade? Seems to be a lot of mystery and not much talk about what they have actually done. I am very curious and just looking for some answers to satisfy it. Figure some of you are well versed on these matters and can provide some answers. TIA
There is so much about the banking system that I don't understand because I've never needed to understand (and still don't).
Last edited by ApeAttack on Fri Jan 21, 2022 5:02 pm, edited 1 time in total.
May all your index funds gain +0.5% today.
Re: Fed Quantitative Easing: interested in details
When banks sell Treasuries to the Fed they are doing so as an intermediary and selling to the Fed on behalf of a third party. They typically would not be selling the Fed Treasuries from their own balance sheet, instead they would be acting as a broker and buying Treasuries in the market from an insurance company, pension fund, corporate, or money manager who is selling and then selling those to the Fed.exodusNH wrote: ↑Thu Jan 20, 2022 10:32 pmHowever, banks need reserves to settle flows with other banks.Dry-Drink wrote: ↑Thu Jan 20, 2022 1:56 pmSorry maybe I'm a little dense but I don't understand how your response answers my question: Why would a bank sell the asset to the Fed in exchange for bank reserves when banks don't need bank reserves to function and those bank reserves cannot be used for anything by the bank?km91 wrote: ↑Thu Jan 20, 2022 1:11 pmThe US Treasury market is the deepest, most liquid market in the world. It does something like half a trillion dollars in volume daily. The Fed's asset purchase are a tiny fraction of that and typically it's not going to have a problem finding counterparties who are selling. If it was the case that the Fed's demand for Treasuries outstripped supply the price of Treasuries would have to increase to induce more sellersDry-Drink wrote: ↑Thu Jan 20, 2022 12:55 pmThanks that was a really useful video but there's something I don't understand.
If the banks cannot "lend out" the excess reserves from the proceeds of QE, then why does the bank even sell the bonds to the Fed in the first place? The banks can just sell the bonds directly in the market if it didn't want them. In other words, what is the mechanism that encourages banks to buy up the assets that the Fed wants to buy when it is quantitatively easing? Is it because the Fed will pay an interest on excess reserves that is greater than the overnight rate?
If it were a Fractional Reserve system, or if the Fed paid with actual cash that the bank can then in turn use, then I get it. Is there a mechanism by which a bank can trade their excess reserves for capital that they can then use to buy assets or make investments?
I don't know why the banks would want to sell to the Fed instead of the market. My assumption -- based on no research -- is that they can get the Treasuries back at the price they sold them for rather than having to deal with the market fluctuations. I assume that it's also a faster process than whatever typical market settlements would be.
The Fed is also a willing buyer. In times of crisis, everyone is trying to get cash. It may not be possible to offload them into the market.
Re: Fed Quantitative Easing: interested in details
To new investors - Remember that you don't need to understand the Fed in order to invest.
A simple "set and forget fund", like a Target date fund, is all you need. If you want to get complicated, go for a Three-fund portfolio. You are done.
Re: Fed Quantitative Easing: interested in details
Absolutely. Understanding how the banking system and the Fed work will have no impact on my investment strategy.LadyGeek wrote: ↑Fri Jan 21, 2022 1:22 pmTo new investors - Remember that you don't need to understand the Fed in order to invest.
A simple "set and forget fund", like a Target date fund, is all you need. If you want to get complicated, go for a Three-fund portfolio. You are done.
I'm lucky to live in a time when index funds and TDFs exist. It's so incredibly easy.
May all your index funds gain +0.5% today.