Does Money Grow On Trees?
Washington, DC — Many Americans are unaware of a new practice by the Federal Reserve — they buy securities from the Treasury Department. This is even easier than picking money from a tree. You just print it. In their most recent meeting, the Fed acknowledged a concern over increasing this practice and that the “federal debt was being monetized.”
Minutes of the Federal Open Market Committee
The staff also reviewed the experience to date with the Federal Reserve’s purchases of Treasury securities, agency debt securities, and agency MBS. A number of potential modifications to those programs were presented for the Committee’s consideration, including possible expansions in their size, extensions of the duration of securities purchased, steps to increase the flexibility of those purchases both within each program and across programs in response to short-term market developments, and possible approaches to winding down purchases as the programs near completion. The Federal Reserve was already purchasing a very large fraction of new current-coupon agency MBS and agency debt, and further increasing the scale of those programs could compromise market functioning. Some participants thought that increases in purchases of Treasury securities might have little or no effect on long-term interest rates unless the increases were very sizable, given the large amount of current and projected supply of Treasury securities. Others were concerned that announcements of substantial additional purchases could add to perceptions that the federal debt was being monetized. While most members did not see large-scale purchases of Treasury securities as likely to be a source of inflation pressures given the weak economic outlook, public concern about monetization could have adverse implications for inflation expectations. The asset purchase programs were intended to support economic activity by improving market functioning and reducing interest rates on mortgage loans and other long-term credit to households and businesses relative to what they otherwise would have been. But the Committee had not set specific objectives for longer-term interest rates, and participants did not consider it appropriate to allow the Desk discretion to adjust the size and composition of the Federal Reserve’s asset purchases in response to short-run fluctuations in market interest rates. Some participants noted that, in principle, the Committee could formulate a plan for asset purchases that would respond to economic and financial developments in a way that might better promote monetary policy objectives. Most, however, thought that formulating and communicating such a plan would be very difficult, potentially leading to an increase in market uncertainty regarding Federal Reserve actions and intentions. Many participants agreed, however, that it was appropriate for the Desk to make small adjustments to the size and timing of purchases aimed at fostering market liquidity and improving market functioning. Participants discussed the merits of including securities backed by adjustable-rate mortgages in MBS purchases and of tapering off purchases of securities as the asset purchase programs were being completed, but the Committee did not reach a decision on those issues at the meeting.