I’ve heard that this happens through banks, but what financial mechanism is used to do this? It can’t simply be “Hey Chase Bank, here’s $100 million for free”.
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They’re all “temporary measures” that are kinda at this point extended into perpetuity.
The only money the fed prints is loaned out. They don’t give chase 100 million for free they loan it at cheap rates, they choose these rates to manage the economy, high rates to slow growth cause high rates means chase will only loan that money at high rates not acceptable to everyone, and low rates to stimulate growth.
The Fed lends banks money, which the banks then lend to businesses and consumers. They control the interest rate at which they lend it.
When that interest rate goes up, the banks raise interest rates as well. Would-be borrowers are driven to either not borrow or borrow less.
This reduced borrowing restricts the amount of money moving through the country’s economy.
If the Fed lowers interest rates, the cash flow increases instead. More businesses and people can afford bigger loans. They spend this money and the cash flow increases.
In addition to lending money to banks, in the past the fed bought bonds on the public market which increased the money supply, and they are currently letting those bonds mature which will reduce the money supply
They print money and then they use that money to buy treasury bonds from banks. The money goes to the banks and the t-bills come back to the fed, badda bing badda boom, and when they want to decrease the money supply, they sell the t-bills to the banks and money comes back/out. And the US Treasury decides how many t-bills there are. This system provides a lot of control, from the public sector, over these operations while also having them take place in the open market.
Start with the fact that commercial banks (not the Fed) have to hold money for transactions. However, they don’t like holding money, because they’d rather hold an asset that provides some return (even a small return).
So if a bank has more money than they legally need to hold, they may purchase a safe asset like a Treasury bill. But they can’t tie up their money for long (maybe they’ll need it tomorrow), so they might do what’s called a reverse repurchase (reverse repo) agreement: they agree to buy a safe asset, and then sell it back for a slightly higher price in the near future.
On the other side of this deal might be a bank that needs more money overnight. So they agree to sell their asset and buy it back tomorrow at a slightly higher price. This is a repurchase (repo) agreement. They are basically taking out a short-term loan.
That loan has an implicit interest rate. If they sell a Treasury bill for $100 and agree to buy it back tomorrow for $100.01, it’s an overnight rate of .01%, or about 3.7% annually.
This is where the Fed comes in. There is a large repo market in the US, so the Fed tries to get that market rate (3.7% in my example) close to the target Fed funds rate. The Fed can do either a repo or a reverse repo, depending on how they’re trying to move the interest rate. The Fed is really targeting the interest rate, not the amount of money, but a Fed repo will take money out of the banking sector (banks get the asset, Fed holds the money), and a Fed reverse repo does the opposite (Fed gets the asset, banks hold more money).
That’s one of the big ways. It gets complicated. The Fed can now pay interest on deposits that banks hold at the Fed (that used to not be true). It has recently bought/sold other longer term assets. And it can loan money directly to banks through the discount window, although historically that’s been pretty rare.
Imagine the Federal Reserve as a central bank that owns a) a very large hypothetical sack of cash and b) large holdings of Treasury bonds.
If you aren’t familiar with bonds, they are a promise to pay – e.g. $1 invested in a bond with 1 year maturity at 5% interest rate means that next year, you expect $1.05 back.
When the economy slows down or is in a recession, we wish to stimulate the economy. One way the Fed does this is by using some of that cash to buy more Treasury bonds. Since that sack of cash has just been sitting in the Fed but is now in circulation, the money supply has increased – the Fed has “created money”. However we can’t simply create money out of nothing. The Treasury has to pay the Fed back (along with interest) when the bonds expire, where the amount owed is considered part of the “national debt”.
In the opposite case, when the economy is booming and getting inflationary, we wish to slow the economy down. One way the Fed does this is to sell some of their Treasury bonds that they previously bought. They take the cash from the sales and add it back to their sack of cash, which decreases the money supply – the Fed has “destroyed money”.
In practice, all of this is done electronically of course in the modern age.
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