How exactly does the FED’s money enter/effect the market?


How exactly does the FED’s money enter/effect the market?

In: Economics

Fed gives money to banks. Banks either invest it into a company or give out as a loan to companies. Those companies use it to keep themselves afloat until they can get back to creating a profit. This stops big layoffs and stuff from happening which in turn prevents a market collapse.

Of course, that’s how it’s supposed to work. But what really happens is the rich find a way to keep that money, and use it to fund politicians into passing rich friendly laws, furthering the income gap, and normal working class people pay for it.

The usual way they inject money is by buying government bonds.

Today a big part of what the Fed announced was that they were essentially going to inject money into the repurchase (repo) market. Basically the repo market is way for financial institutions to fund themselves on a short-term basis. Generally what happens is that bank A sells bunch of securities (usually US government bonds) to bank B in exchange for a promise to repurchase them in the near term at a slightly higher price – that higher repurchase price effectively acts as the interest rate.

What the Fed is doing is basically offering to take the role of bank B in the example above.

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.