Mikebert Wrote:Interest rate policy is performed using open market operations. If the Fed wants to keep interest rates low they buy government debt. They buy it with dollars they create. Monetary easing adds money to the economy. When the Fed hikes rates they sell government bonds for dollars, removing those dollars from the economy.
I agree with the above as an explanation of "FOMC operations".
Quote:Normally the bond being uses are short term government securities. One could do open market operations with other kinds of bonds. When they do that they call it quantitative easing. During 1942-1951 the Fed performed open market operations with both short term and long term debt maintaining interest rate pegs on both.
Theoretically, and what you say above is also correct. To expand on it, the Fed can purchase trash assets as well! Rags wonders to no end how much Fannie Mae/Freddie Mac trash has landed on the Fed's balance sheet.
Now to make this whole "what the Fed does" real simple, can be stated as such.
The denizens of the Fed gather for FOMC meetings, go outside, piss in the wind and set interest rates based on which way they think the way the wind blows.
Apparently, they have had a spate of full bladders since the piss indicator is stuck in neutral by way of them having piss all over the bottom halves of their bodies. Further, since that is what they do, the Fed should be abolished since the interest rate, which is the price of money can never, ever be centrally planned.
Edit: Whoah, on that link, man.
Bernanke Wrote:Deflation: Its Causes and Effects
Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.
No! Deflation is defined by the decrease in money + credit relative to the supply of goods + services. Geeze, no wonder why the Fed is so messed up. Bernanke may have a Phd. but methinks he's a habitual user of stupid sauce, aka booze.
No wonder why the Fed can't spot an asset bubble even it smacked them in the face. That's why the numbskulls don't know that all that QE juice has gone into Silicone Valley unicorns and really weird house prices.
On, deflation. Interesting. If the US wasn't such a debt besotted place, then deflation wouldn't be such an issue. Rags would love deflation because that means he could buy more stuff over time since his dollars would fetch more stuff as time passed.
Deflation is only a problem for the debt besotted 'cause it's an effective rise in interest rates which can bankrupt certain debtor parties.
---Value Added