How exactly does the FED’s money enter/effect the market?
In: Economics
To the best of my knowledge,
Banks create money through the lending process. Someone has the desire for more money, so they make an agreement with a bank to borrow money. The bank creates the money in exchange for the debt instrument. How much money they can lend is limited to a ratio of how much “reserves” they have. So if your bank is operating in a country with a 10:1 ratio, they can lend out 10x the amount of money they must keep in reserve.
So if the federal reserve decides they need to increase monetary supply, they increase the amount of reserves in lower banks and this allows them to lend more money to the public. They do this by converting the banks debt instruments into money. They can “lend” the bank money which creates money via the above process with the debt instrument as collateral or they can buy the debt instrument with money they already have.
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