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Is the Federal Reserve allowed to deal with the Treasury directly?
According to some sources, the Federal Reserve is only allowed to buy bonds on the open market from primary deals (doesn't include the Treasury) in order to increase the amount of reserves for the money supply to expand. It is forbidden from buying and selling from the Treasury directly as it would be too much like the Treasury printing money. However, another source says different: The process actually begins with the Treasury Department printing a piece of paper called a bond, which is done electronically. Treasury bonds are debt obligations (liability) of the government to repay a loan - with interest. The Treasury sells bonds to the public. The bonds the public does not buy, the Treasury deposits with the Federal Reserve. When the Fed accepts the bond from the Treasury, it lists the bond on its books as an asset. Because the Fed now has an asset that it didn't have before receiving the Treasury bond, the Fed can now create a liability that is offset by its new asset. The liability that the Fed creates is a Federal Reserve check. It gives the Treasury the check in payment for the Treasury bond. THERE IS NO EXISTING MONEY IN THE FED'S ACCOUNT TO COVER THIS CHECK. The Federal Reserve check is endorsed by the Treasury and is deposited in one of the government's accounts at the Federal Reserve. The government can use the deposits to write checks against, to pay for government expenses. This is the first new money flow to enter the system. Various government contractors, vendors, etc. receive these checks as payment for services rendered, and they take the checks and deposit them in their commercial banks. Just for a clarification: My question is: Is the Federal Reserve allowed to accept bonds from the Treasury directly? i.e. Can the Treasury simply print up some bonds and sell them to the Fed directly for its loans? (is this allowed?). Or is the Treasury only allowed to sell to the public/primary dealers and in turn the Federal Reserve will buy from primary dealers? Why is it that we have the primary dealers as the middle man? This is the link for the second part which says that the Treasury will deposit bonds that it cannot sell with the Federal Reserve: http://www.financialsense.com/fsu/editorials/gnazzo/2005/1129.html
Public Comments
- I'm not sure the basic premise of your question makes sense. Re: "The Treasury sells bonds to the public. The bonds the public does not buy, the Treasury deposits with the Federal Reserve." Has the Treasury *ever* found itself unable to sell bonds? They sell them via auction so there is always some price someone is willing to pay. I think your source may be flawed. Could you add a link to your source? EDIT: - Re: "Or is the Treasury only allowed to sell to the public/primary dealers and in turn the Federal Reserve will buy from primary dealers? Why is it that we have the primary dealers as the middle man?" Anyone can buy bonds from the Treasury, even you. Just go to TreasuryDirect.gov. The reason there is this separation of activities has more to do with ensuring strength of the currency. If the Treasury sold directly to the Federal Reserve to get thin-air money, that would be considered the government printing money to pay for expenses. This would undermine it's value on the world market.
