Fed bond buying explained - concept and mechanics of quantitative easing
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- Опубликовано: 13 июл 2024
- This week, the Fed (Federal Reserve) announced it will begin to taper its bond purchases. To understand the significance, you need to comprehend how bond purchases affect interest rates. A simple explanation of the mechanics of bond buying, quantitative easing and quantitative tightening.
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Ted Erhart, CFP®
Financial Planner
Anoka, Minnesota
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Related video: Why does the Federal Reserve buy bonds? ruclips.net/video/KD6H0EgNwqY/видео.html
Your explain is clear and understandable for those of us that didn't understand what the "FED" has been doing in the bond market.
This was definitely a clear explanation of a difficult concept. Thanks a lot.
Good one Ted.. Very clearly explained
Explain clearly thank you
Great explanation
Great content and very easy to understand
Thanks for explanation. I suggest the mathematical explanation on how price and interest rate are inverse proportional
Very confusing to get your head around the concept but thank you for the effort to explain it.
Oh it's on purpose but he did wonderfully
very informative, thank you!
Sir how printing money and bond are co related kindly make a video on it... Love and respect to u sir from India
@@sagarsarmah790 I'm not sure I understand your question. Are you asking why the Fed buys bonds vs printing paper currency.
@@TedErhartCFP sir I am asking how printing money affects bond Market
Another home-run video, just wondering, when the Fed starts "pulling money out of the system" to avoid a lasting expansion in the money supply, does it sell bonds back where they came from? What incentive will the banks (or anyone else) have to buy back?
If the Fed is the buyer/lender of last resort, always there to receive the bank's unloading, who's there to receive the Fed's unloading?!
If the FED wants to drive rates down, how can they do this while concurrently letting bonds mature which they plan to do in July?
hold up i thought open market buying of bonds -> fewer bonds->hgiher prices, lower yields? what u said at the end said lower prices and lower rates ?
how does fed issue of debt work!?
In other words by the Fed making money by selling debt, they can in turn lower interest rates for future borrowing??
Nice video. In theory, QE should reduce yield, in reality it is actually positively correlated to yield.
Also, you forget to mention that central banks don't purchase bonds for money - they perform an asset swap between reserves and asset backed securities.
Reserves are not money and can only be used in the inter-banking system, thus meaning that this 'purchase', in net terms, is akin to taking the bonds out of circulation without introducing any money (to buy bonds or anything else) into the system.
Finally, central banks do not control money supply, it is instead entirely dependent on regular banks that issue credit. Even if QE did decrease yield, it has virtually no effect on bank lending capacity and willingness.
Thanks for the comment. All good points. This was meant to be a bond buying 101 for a general audience. Simple and relatively short. If I attempt a 201, I'll definitely get more into the weeds with some of those details. Cheers!
Dear Tiempo, Are you saying that QE does not free up money for banks to then lend further? I was under the impression that the money pushed in via QE is finding its way in stock markets and raising stock prices and also prices of others assets like houses.
@@Vikas-pv3ie Banks do not lend money, they create money when they lend. You can read more about this in the Bank of Englands Quarterly Bulletin 2014 Q1: Money creation in the modern economy.
Simply put: When you 'borrow' 'money' from a bank, what you are doing is issuing a security to that bank. On their balance sheet they now have a new asset (your word that you will repay). They also have a new liability (the 'money' that they owe you).
This liability is the credit that they owe you. This credit did not previously exist. There is no 'base cash' that they store to lend to people. When you put your credit in a savings account they do not lend this 'money' out.
The only limit a bank has as to how much they lend is how secure they feel the collateral is (i.e. your word).
It is important to understand that the credit a bank owes you can only be transfered to individuals or institutions that have a bank account with a bank that is in the system. You can think of the 'money' in your bank account as the amount on a gift card that can be spent in pretty much any store (because they all have bank accounts with banks that are in the system).
Central banks cannot create credit in this system. The "reserves" they create have little to no impact on bank lending practices. "Reserves" can only be transfered to institutions that have an account within the *central bank* system. This means that they cannot buy anything with reserves unless it is from another major bank (very few banks have an account with the central bank).
In essence, "reserves" are stuck in the central banking system and do not interact with the real economy.
Additionaly, "reserves" are also securities, this means that this "new money" is a liability on the central bank's balance sheet. Central banks therefore do not purchase asset backed securities, they keep them on their balance sheet as collateral for the "reserves" that they issued.
There is no net positive, no new money in the system, and on top of that, the asset backed securities that would otherwise be used as collateral are now replaced by (in my opinion) inferior collateral ("reserves").
Why do stock prices go up?
Because financial journalists don't do any research and everyone parrots what the central bank says without thinking twice.
Thanks a lot@@tiempo9855 for taking time to respond. Greatly appreciated! It makes points much clearer. Also many thanks @Ted Erhart, CFP® for the video.
What is the difference between QE (QT) and open market operations?
QE and QT describe two different types of open market operations. When the Fed is buying bonds in the open market, that is QE. When the Fed is selling bonds, or letting bonds mature and not reinvesting, that is QT.
You need to really understand debt is credit positive and negative since money got of gold it went to negative so If we bring it down with means barrowing money debt grows inflation grows. You want to be out fed congress and president most stop spending that's all one has to raise any prizes because everything is runing good just that they can go around spending as they want and no bonus for them and well that is not how things run but because they have their instructions up side down flip it around you all will see not spending and by time the country and any other country will come out of negative turn to positive with out being backed up by gold but for the value of strangeth. I just have gave the world the answer to the question many have thought over and over. I hope the best for you all.
How does the fed buying bonds “increase demand” for bonds?
Beginning in June of 2020, the Fed committed to buying $80 billion worth of US Treasury debt EVERY MONTH. This means, on an annualized basis, the Fed was buying up over 3% of the ENTIRE market. To understand this, think about real estate. Doing a quick search, I found a statistic estimating the US residential real estate market at $43 trillion. Now imagine, starting today, a new market player/investor shows up and begins buying $1.3 trillion worth of US homes ever year. That would be $1.3 trillion of demand that didn't previously exist. Think about what this would do to prices. In-effect, this is exactly what the Fed has been doing in the bond market...using it's ability to create money to increase bond prices (which pushes interest rates down).
@@TedErhartCFP Thought so. So the fed was sucking supply out of the market, driving prices up.
@@TedErhartCFPso to be clear, driving the market? But I'm essence the lower the rates the lower the us debt? Or the lower rates equate to more overall debt?
715 increase price of debt, you must increase demand for that debt
Is it that the Fed wants to drive interest rates down, or is that a by-product of what it really wants - (1) to purchase bonds from whoever wants to sell them in order to mitigate the fallout from privately-held non-performing debt (non-performing relative to other asset classes) - remember what Lehman Bros had to do to get rid of their non-performing debt instruments and the fallout that ensued across both the United States and the European Union, and (2) to ensure that it maintains a dominant market position in debt markets to prevent a country's economy (these days has a large speculative component) from being hijacked/manipulated by lenders that are less married at the hip to a country's government and the performance/stability of its economy. I'm happy to be corrected or have the subject matter clarified from a risk management perspective. I must admit it's not my field of expertise.
I think it depends. For instance, the original QE policy implemented by Bernanke was explicitly in-place to push down long rates. In the case of Lehman, or March of 2020, Fed was pumping liquidity in to stop the panic initially. In the panedmic era, it's pretty clear the objectives shifted from stopping the panic to suppressing rates to aid the recovery. At this point, it looks obvious that rates were held down for far too long.
Oh my god I'm so stupid
So basically FED buying bonds = the money printer will keep working , inflation will skyrocket . Of course they will keep interest rates down , regarding the US debt . Or maybe I didn't get it ?
6:00 Borrow from who?
The short-answer is "the market," i.e., investors. Please note that those were market rates at the time of recording.
Hello