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Why does the Federal Reserve (the Fed) buy bonds?
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- Опубликовано: 14 авг 2024
- If you pay attention to any financial media, there is often mention of what the Federal Reserve is doing. Why is the Fed so important? What does it mean when the Fed is creating money? The Federal Reserve is one of the most influential institutions in the world. In this video, I touch on one specific activity the Fed engages in, bond buying, and why.
My professional focus is retirement planning for individuals over age 50. Please visit our website or reach out!
Ted Erhart, CFP®
Financial Planner
Anoka, Minnesota
www.norrislakeretirement.com
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Related video - Fed bond buying explained - concept & mechanics of quantitative easing: ruclips.net/video/KD6H0EgNwqY/видео.html
I've been watching hundred of videos here in RUclips trying to wrap my head around the idea of quantitative easing, and your video is the one that has enlightened me the most... Thank you very much... You are a good teacher!
Glad it was helpful!
Try Mike Maloney's Hidden Secrets of Money. This video was a little dry like you could get on university. Doesn't show how ridiculous fractional reserve banking and fiat money are. And that the Fed has the power to buy the world.
Oh nice so, the FR gets to buy all the bonds at or near the bottom every time. What a nice system!
Thank you. Really useful to understand the current buy of bonds by the Bank of England.
Thank you! I never thought my first video would be my most popular. Glad it was helpful. People obviously are very curious about this subject.
You answered ALL of my head scratching questions! Thank you sir
by far the best and simplest explanation of why and how the fed purchases bonds!
Thanks! I appreciate the comment.
Thank you. Your explanation is so much easier to understand than my book
Glad it was helpful!😄
I like the content of your video a lot!
I was wondering whats all about the FED buying bonds like crazy and couldn`t find any good answer in the internet.
But after watching your video I now understand the logics behind this process.
Thanks a lot for your effort and keep it up!
You sir just educated me for free and I appreciate that a lot!
Thanks for the feedback!
such an incredible video wow thank you very much. you explain it extremely well.
Excellent video... With all that's currently going on with the Federal Reserve, I now have a basic understanding of the function of the Federal Reserve. Thank you so much!
Just exactly the video I needed. Easy to understand! THANKS TED!!!
Good job!
Very helpful and informative. Thank you so much!
Glad it was helpful!
Very clear and informative video. I'm on a hunt to understand things like QE, overnight lending, fed balance sheet, etc and this video definitely helped.
Thanks for the comment! Check out my video on the Fed balance sheet. I've had a lot of positive comments.
@@TedErhartCFP I did, another very detailed and informative video, those details really clarify the mechanism better, thank you, I see a couple other videos I'll get to watching, I'll leave you a question there to help with the YT algos :)
An easy to understand, informative video about an issue that is very relevant. Subscribed!
Glad it was helpful! Thanks!
Thanks for the video a real gem
Just what I needed! Thank you!
Excellent thanks
great video
Thanks Ted! Great video.
VERY HELPFULL, I'LL RECOMMEND YOU
Very clear explanation. Awesome job.
Sir how bond yield curve ,inflation and purchasing bonds are related can u make a video of it.... Truly respect and appreciate ur way of teaching
Really well explained. Thank you.
Thank you so much!
Glad it helped!
Great. Can you elaborate on the creation of those treasury bonds?
And how Currency is created?
And maybe if the givernment keeps running a budget deficit and having a huge debt to gdp (129% in 2023) how that can devaluate the dollar?
Most is created on a ledger than the Fed is in charge of. They literally write down what they're giving these banks when they buy their assets (at the discount rate), and the Fed can now transfer this amount through their digital ledger system to the bank. If a bank needs x amount of cash on hand, the Fed will send that as well... while ensuring the bank has enough extra for their normal day to day operations (although most money is just created on the digital ledger system though). This is why banks now question most large withdrawals. If you're a bank that goes back to the Fed a lot or borrows more than others (banks monitor each other's activities in the interbank market), it becomes more difficult for you to borrow money and you have to pay higher interest rates, meaning less overall profit.
The central banks have started the tapering. So bonds buy back are being decreased, but that is not a problem even when banks do not have enough liquidity. Because they can loan money from the central bank for (almost) free! As much (well not really of course, but still) as they want. And that is the whole problem with this 0% interest rate.
These loans are always short term and even 0,1% can mean big troubles for banks, if the cash is simply not there.
So the banks are now addicted to all this "free" cash. And that is not healthy.
So much money has poored into the economy now that inflation is starting to sky rocket. The 'little' person is the first to take the hit. But once they stop consuming its the companies that take the next hit together with their shareholders.
Everybody can say they got this under control. But nobody is willing to admit that interest rate has never been this low, so nobody really knows how this will end up.
good stuff
Thanks for the feedback. I appreciate the comment!
Great video, just one question, in fractional reserve banking system isn't it that banks could lend money even without any deposits by purely leveraging their existing reserve? So on the balance sheet in the video could total assets exceed total liabilities by a fairly large margin? Thanks!
If I'm understanding your question correctly, sure, but then the entity wouldn't really be a "bank" in the traditional sense. Taking deposits and creating loans is generally what defines a bank. But there are firms, generally known as "investment banks," that don't take deposits. Instead, they fund their investments/loans with short-term borrowings via the market. To provide a very basic example, an investment bank could buy $1 million of Apple stock with a combination of 80% cash and 20% margin debt. In this example, the $1 million asset would greatly exceed the $200k margin loan. However, COMMERICAL banks generally want to maintain high leverage to magnify their return on equity. For example, if investors started a bank with $100k and took no deposits, it could only lend out $100k. But if the bank takes deposits, it can then lend far above the $100k that shareholders put in and earn a greater returns on that equity. Hope that helps. This subject is tough to explain over text because accounting comes into play and there is lots of jargon.
I'm very confused because the European central bank is hiking rates but still buying bonds. What is the logic of this do you know?
I don't follow the ECB that closely. That said, I do know there is concern about the effect of rising interest rates on the higher indebted countries in southern Europe. So if I had to guess, I'd say the ECB is trying to do two things which seem contradictory...raise short-term interest rates to tame inflation, while keeping long-rates in-check (via bond purchases) to avoid rapidly rising borrowing costs for governments which could create a lot of issues.
@@TedErhartCFP Thanks, that was helpful. I'm trying to figure out these things by myself and I came across your channel. 👍
When the Fed reduces its balance sheet but dumping bonds, what exactly is happening? Are they selling them back to banks or are they literally just removing them from the system (deleting)?
In short, the Fed is allowing debt to mature. As it matures, they are not reinvesting the proceeds. So yes, they are "deleting" or destroying this money which reduces the money supply and liquidity.
Great little video Ted, would be great to get your thoughts on the implication of the current debt spiral facing the US government, money printing has to continue to service debt, but at what point does it implode?
Commercial banks create 💰 when expanding their own balance sheets, right? They make a loan and a corresponding deposit for the debtor to spend.
Yes. I used the word "controls" in the video. "Influences" would have been a better choice.
Don't the largest commercial banks in the United States effectively also create money when they make loans?
All banks that lend create money via the deposit multiplier.
When you're using the term "deposits" I'm confused, if you say only a fraction are 'liquid'. If I was going to lend out money, I would need to that money before I could lend it out. Are you saying that banks only need roughly 10 percent of what they lend out? Then one can legitimately use the term "deposits" so long as they have the roughly 10 percent they need. But when you say those deposits don't need to remain liquid, this loses me. They've been lent out If the excess 90 percent stipulated in codified legal guidelines is already lent out, why do we call it deposits? Tricky stuff!
Great Job, Ted. I'm curious about the relationship between National debt and the Fed Balance Sheet. Is the balance sheet a part of the National debt? how can the Fed raise their balance sheet without congress when there is a debt ceiling?
Also, I understand the yearly deficit goes into the National debt, I assume its from bond purchases but does that include money that will need to pay back investor when the bond matures or is it interest only and we borrow money again when the bond becomes due to the investors? I keep trying to find this information online but haven't found a good one yet. Thanks.
It's a good question. The Federal Reserve's balance sheet is completely separate from the national debt. The Fed uses its balance sheet to influence the money supply and interest rates. The national debt is basically the sum of all the annual budget deficits over time. Another way to say this is imagine you as an individual spend more than you make every year because some bank keeps borrowing you money. The debt accumulates year-after-year. The same is true for the national debt. As long as a budget deficit exists, the national debt increases.
The national debt is owned by investors around the world in the form of US Treasurys. Individuals, investment companies, foreign governments and central banks, including the Federal Reserve, all buy US Treasurys. But the Fed's bond buying has no direct connection to the amount of national debt.
Thank you for the quick reply. I assume, the payment each year to pay back the bond holders as they come due includes principal due that year and not just the interest?
@@jcancook1 The Federal government is constantly issuing new debt of various maturities. For example, an investor can buy Treasurys maturing basically anywhere from a week in the future to 30 years. Therefore depending on the maturity of the debt, some is only interest, others are redemption of principal.
Great! thanks for the quick reply!
how is this helping stock market going up? what's the relation?
There are multiple reasons but the biggest is the suppression of interest rates. With the 10-year government bond yielding only 1.3% currently, investors are forced to look elsewhere for returns. Most pension funds need a 7% rate of return to meet their future obligations for example. Likewise, most retirees need at least mid-single digit returns to make their money last. Therefore, money has shifted to stocks out of pure necessity of generating returns. That increased buying pressure pushes prices up. Interest rates affect everything. Other reasons include lower borrowing costs for companies which pushes profits up. This also makes debt financed stock buy-backs or acquisitions more tempting. It also makes it cheaper for investors to borrow money at low rates and attempt to capture higher returns. The list goes on. What's scary however, is the opposite of everything is also true if/when rates start to rise.
@@TedErhartCFP Ted thank you so much, for your reply, this is great. im subscribing to your channel I want to learn macro economics how this whole thing is intelinked and how it works. again thank you for your time.
Are you Canadian? Northeast USA?
Minnesota. And yes, I have the accent bad despite my best efforts, LOL.
Teach your people how to buy bitcoins, hold them and that's it