The Federal Reserve operates like any other bank with the exception that as a central bank it is exempted from capital ratios and also serves as the Bank for the US Treasury. Because it isn’t limited by capital ratios it can’t absorb losses and so is constrained by US Congress to US guaranteed debt instruments.
If this were not the case and the Federal Reserve were to lose money and be need to be bailed out the Federal Reserve would be making fiscal policy which is reserved to the US Congress by the constitution.
In other words the Federal Reserve would be able to bail out Ford Motors investors (if it wanted to) by simply buying unlimited amounts of Ford Motors bonds at below market rates. This would tend to piss off Congress who rightly believes that the Constitution grants them that authority.
In some cases Congress has granted the Federal Reserve some authority to purchase other assets such as during the 2008 financial crisis. I’m that case a specific amount of money was allocated by Congress. The Federal Reserve ended up leveraging up the allocated funds which ended up working out for the Taxpayer but didn’t make some in Congress happy.
The net-net of that rambling is that the Federal Reserve is fairly limited in what it can buy so it has very limited control over where they money it creates goes. It can flow into assets like stocks or real estate or into consumer loans to purchase groceries if there are people willing and able to assume more debt and banks able to lend it.
Congress and the Federal Reserve working together have more options. Congress can allocate $1 trillion dollars to fund a green energy program and then the Federal Reserve can buy all of the bonds necessary for the Treasury to fund it. The Treasury pays interest on those bonds and the Federal Reserve gives it back to Congress. As long as the Federal Reserve continues to roll the bonds it is essentially “free money”.
Of course nothing is ever really free as this free money transfers purchasing power from people holding cash as they are diluted. This is essentially what happened during covid.
Long term the bill still has to be paid either through taxes or increased inflation (like we’re seeing now) both with consequences for the economy.
If Congress wanted to provide more tools to the Federal Reserve it could provide them with tools to funnel money directly to households. For example creating an “America Saves” program where employers would be required to fund an employee savings account each year invested in US Treasuries which employees could borrow against and interest paid accumulated to the employee.
The Federal Reserve could create money by purchasing Treasuries from these accounts when consumers took out loans and remove money by increasing interest rates and limiting the percentage of assets that could be borrowed against.
If this were not the case and the Federal Reserve were to lose money and be need to be bailed out the Federal Reserve would be making fiscal policy which is reserved to the US Congress by the constitution.
In other words the Federal Reserve would be able to bail out Ford Motors investors (if it wanted to) by simply buying unlimited amounts of Ford Motors bonds at below market rates. This would tend to piss off Congress who rightly believes that the Constitution grants them that authority.
In some cases Congress has granted the Federal Reserve some authority to purchase other assets such as during the 2008 financial crisis. I’m that case a specific amount of money was allocated by Congress. The Federal Reserve ended up leveraging up the allocated funds which ended up working out for the Taxpayer but didn’t make some in Congress happy.
The net-net of that rambling is that the Federal Reserve is fairly limited in what it can buy so it has very limited control over where they money it creates goes. It can flow into assets like stocks or real estate or into consumer loans to purchase groceries if there are people willing and able to assume more debt and banks able to lend it.
Congress and the Federal Reserve working together have more options. Congress can allocate $1 trillion dollars to fund a green energy program and then the Federal Reserve can buy all of the bonds necessary for the Treasury to fund it. The Treasury pays interest on those bonds and the Federal Reserve gives it back to Congress. As long as the Federal Reserve continues to roll the bonds it is essentially “free money”.
Of course nothing is ever really free as this free money transfers purchasing power from people holding cash as they are diluted. This is essentially what happened during covid.
Long term the bill still has to be paid either through taxes or increased inflation (like we’re seeing now) both with consequences for the economy.
If Congress wanted to provide more tools to the Federal Reserve it could provide them with tools to funnel money directly to households. For example creating an “America Saves” program where employers would be required to fund an employee savings account each year invested in US Treasuries which employees could borrow against and interest paid accumulated to the employee.
The Federal Reserve could create money by purchasing Treasuries from these accounts when consumers took out loans and remove money by increasing interest rates and limiting the percentage of assets that could be borrowed against.