12

This is surprisingly subtle. When, for instance, when bank A in the Richmond Federal Reserve district sends $1000 in reserves to bank B in the Minneapolis Federal Reserve district, reserves are taken out of bank A's account at the Richmond Fed and placed into bank B's account at the Minneapolis Fed. Now, bank A's reserves are a liability on the books of ...


12

Normative questions require a standard of fairness in order to then be analyzed and answered with some degree of "objectiveness" so that the answer is not just a declaration of philosophical-ideological positions. The OP starts by writing "Basic logic says that, once a central bank is issuing new money for increasing the money supply, the money should be ...


9

This happens all the time and is normal. Its due to measurement error. It is hard to measure these things in real time and as time goes by more data comes in which allows measurement of GDP and other macroeconomic variables to be better so they are revised. Sometimes the revisions can be quite large. Typically the latest data is also the least reliable. For ...


9

The Fed introduces money in the economy through the banks via the mechanism of fractional-reserve banking, as you mentioned in your article. This means the Fed is then allowing the banks to provide credit to anyone who they find adequate. The reason to do so is that banks will favor investment opportunities which lead to long term growth, such as build a ...


8

According to this official link Does the Federal Reserve ever get audited? Yes, the Board of Governors, the 12 Federal Reserve Banks, and the Federal Reserve System as a whole are all subject to several levels of audit and review: The Government Accountability Office (GAO) conducts numerous reviews of Federal Reserve activities. The Board'...


8

@capm is correct that the Fed is not allowed to buy equities (though they may lend against them if need be, so long as they are secured to their satisfaction— see, for example, all the things they lent against in the Maiden Lane transactions), however, they're allowed to buy a lot more than "government securities" (i.e., Treasuries). Section 14 of the ...


7

No, the Fed is not allowed to buy stocks, they are allowed to buy government securities in open market operations in order to achieve the target rate for the federal funds rate. The guidelines for this are explained in the Section 14 of the Federal Reserve Act. You can find the Fed holdings in the Federal Reserve Statistics. However other central banks, ...


7

The Treasury auction process is described here: Treasury Direct Bidders can either enter competitive or non-competitive bids. Non-competitive bids are limited in size; the price is set by the competitive bids, which generally come from Primary Dealers (that are obliged to bid). As a simplified example of the bidding process, assume that the government ...


6

Clearing for the US Banks is done through the Automated Clearinghouse System which is operated by the Fed. For transfers of central bank money, which would include transfers between reserve banks, the Federal Reserve also operates the Fedwire Funds Service which is an RTGS (Real Time Gross Settlement) system. This is similar to the Bank of England's RTGS ...


6

The Federal Reserve is a system, consisting of the reserve banks, which are "owned" (in a limited fashion) by their member banks (members select the leadership of the reserve banks), and the Federal Reserve Board of Governors, which oversees the member banks and is independent within the government (that is, the Governors are nominated by the President and ...


5

@BB King's answer is good, but I want to make one point very clear: The Fed did not change the data. The Bureau of Economic Analysis revised the data as a part of its 2013 comprehensive revision process, which it engages in every five years using data from the most recent Economic Census. It may be worth noting that the BEA, which is the agency that is ...


5

You anticipate the answer when you ask: This question can be easily answered if there were any way in which new money can leave the central bank without being paid back. Are there such transactions I don't know about? Indeed, there is always a way that money leaves the central bank without being paid back: the central bank does something with its net ...


5

No, because monetary policy is known to increase inequality. In effect, evidence indicates that monetary policy has contributed toward higher inequality. Therefore, the Fed is not being very supportive of fairness, from this point of view. Reasons are several. Some examples: Booming Stock Markets: low interest rates generate booming stock markets. Because ...


5

Example 1. If I repeatedly make 365 one-day \$1 loans to you over the course of 365 days, then the unadjusted loans (or "financial assistance") I make to you are \$365. However, in effect I've simply lent you \$1 for one year. So, the term-adjusted (or we could say year-adjusted) loans I've made to you are only \$1. Example 2. Loan A: I make you a one-day ...


4

The consensus appears to be that the effect was large and positive. The IGM Forum asked a panel of economists to assess the statement "Informed postmortems of Ben Bernanke’s Fed chairmanship will judge favorably the Fed's creative and aggressive policy initiatives from autumn 2008 through early 2009." Not one disagreed. Weighted by their confidence, 90% of ...


4

First it is helpful to provide some definitions. M0 includes all paper dollars (plus coins and US notes). Regardless of whether or not they they are held in the banking system. M0 is not a useful metric because it omits electronic dollars. The two main liabilities to the Fed are electronic dollars (some refer to them as Fed Funds or deposits at the Fed ...


4

This question as is (October 2, 2015, 15:07 Athens time) should be closed and I voted to that effect. I provide an answer in order to show why it should be closed. As any natural or legal entity, the "Fed" engages in strategic behavior. Strategic behavior is not a priori constrained by moral considerations (and this is why Game Theory has come under fire ...


4

The phrasing of your question (the same is true for your description of your understanding) suggests to me that what you need to understand about money creation in banking is much more basic than "steps and contracts". As a full treatment of money creation would not be appropriate on a Q&A site (it'd be really long!), I will instead recommend that you ...


4

There are several issues here: There are banks offering close to $1.5\%$, some well-known such as Goldman Sachs and American Express Most banks currently have excess reserves deposited in the Federal Reserve System which they could use for lending if they wanted to, so they are not missing profitable commercial lending opportunities due to lack of deposits ...


4

Your understanding is wrong. Nations accrue debt by selling bonds. They pay interest on those bonds to the bond-holders.


3

First, one note on the premise. The Fed basically operates a giant ledger for financial institutions, each of which has a certain balance in its "master account". Over $3 trillion is moved between accounts each day via Fedwire, and these accounts are also used for settling most traditional checks and ACH transactions, which include many of the everyday ...


3

On the Federal Reserve First off a technicality; there isn't a Federal Reserve bank, but 12 Federal Reserve banks that together make up the Federal Reserve System. The Federal Reserve System acts as the central bank for the United States Dollar and as such takes control of that currency. The Federal Reserve Banks have a number of responsibilities, but it ...


3

The two Banks of the United States (the First and Second) were nothing like the modern Federal Reserve system. For example, the First was prohibited from buying government bonds (one of the main roles of the Federal Reserve system is to buy and sell government bonds). Further, neither of the national banks had any role in regulating the banking system. ...


3

Quantitative easing without high inflation can be explained by low velocity of money. Think about a property tycoon who sees times are hard and instead of investing all his money in a development project, he buys gold which he keeps in a vault. The property project would have provided employment, and the wages would be used by workers to buy other things in ...


3

Good question! It seems that one of the reasons was precisely that inflation did not respond. They kept raising interest rates, hoping it would respond at some point. In fact, nominal interest rates have to increase more than expected inflation for the real interest rates to go up, so it made sense. The other reason is also related to the question. It ...


3

When banks borrow from the Federal Reserve they can do so through the discount windows: The discount window helps to relieve liquidity strains for individual depository institutions and for the banking system as a whole by providing a reliable backup source of funding. Much of the statutory framework that governs lending to depository institutions ...


3

No, the deficit is not getting larger due to QE. Certainly not directly, because that's impossible, and also not indirectly, either. Quantitative easing is a policy of purchasing government bonds with the intent of decreasing yields while injecting cash into the economy. It affects only the demand for government bonds, not the supply of bonds created by ...


3

Yes, and they don't need any "unconventional" policy tools to do this, all they need to do is precommit to a future path of short-term nominal interest rates which they will maintain no matter what. The reason that in practice the Fed is unable to control the long end of the yield curve is because the Fed is not an institution which precommits to these kinds ...


3

It is correct that higher rates should strengthen the dollar... IF the increase in interest rates is unexpected and all else equals. I haven't followed this particular rate hike, but here is a basic explanations why the dollar might weaken after an increase in interest rates: The rate hike was widely expected and already priced in by the market, As a ...


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