Posted by: Dirk | March 13, 2015

How many financial assets can the Fed buy per year?

The Wall Street Journal has extracted a couple of funny moments from the FOMC meetings in 2009. Here’s one:

MS. MOSSER. There’s a completely different set of limitations, namely, how much the payment and settlement system can handle, depending on how compressed we make these purchases. We have not done this yet for Treasuries, but for mortgage-backed securities, we think that if we tried to buy $1½ to $2 trillion more this year, we would come close to breaking it.
MR. BULLARD. It’s great to know these kinds of constraints.
MS. MOSSER. It’s possible there’s a workaround for those sorts of things. But if there is, we’d have to start it tomorrow.
CHAIRMAN BERNANKE. We could just acquire Fannie and Freddie directly. [Laughter]

This is interesting. The Fed can create central bank money (reserves) by keystroke and in this manner acquire financial assets, thus reducing their supply and likely increasing the price of the remaining financial assets. Whether it was a good idea to do this will be the subject of some discussion in the future, I think. (Note that the Fed is not allowed to spend those reserves into the real economy directly by buying goods and services. That would be Treasury’s job, with its democratic oversight.)


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