Section 3: What has the Fed done?

Understanding the Federal Reserve (FED) > Interactive Video Lectures > Section III – What has the Fed done?

• In 2010, our central banks started a series of initiatives.
• You could make the argument at that point that our Fed lost control of the economy, because they have used their major monetary tool which was the Fed Funds Rate.
• Under TARP they bought close to a trillion dollars of bad mortgages off the books of the banks.
• They were using their existing balance sheet. They were using capital that they had.
• It took that risk off the banks and put it on the Fed’s balance sheet.
• Following TARP having spent their balance sheet, that’s when our Fed introduced the series of initiatives, that the press has deemed quantitative easing one, two, and three.
• Under quantitative easing, which happened in 2010, right after TARP, our Fed printed up close to $600 billion of new cash.
• Our fed created $600 billion of new cash and used that new cash to buy treasuries.
• The treasuries that the Fed was buying was specifically targeted to the two-year to ten-year maturity note market and trying to drive the interest rates from zero.
• So by the Fed trying to drive these interest rates by buying all those treasuries, they are actually trying to effect things like consumer loans and mortgage rates to get them down to act as an economic catalyst.
• Under QE2 the Fed did another $400 billion, continuing with exactly the same buying programs as we saw under QE1.
• In 2012, the Fed introduced Quantitative Easing round three.
• Under QE3, our Fed was printing up $85 billion a month to continue with the same buying program.
• Under QE3, the notes that we got from the Fed was saying that even though the Fed is seeing lackluster growth, they are seeing enough growth and enough stability that they feel they can start withdrawing from the market.
• Even though we started at $85 billion, as of September, we were down to $40 billion, and in October the Fed discontinued this program.
• What our Fed was doing was buying all these treasuries, increasing demand, increasing prices in an effort to drive interest rates.
• So we could expect that with the Fed no longer acting as that big buyer, that strong demand leaving the market, we should expect a deterioration to treasury prices meaning interest rates are going higher.
• Having put all this liquidity into the market it is quite conceivable that at some point the Fed might need to pull all this cash out.
• For the last three years the Fed has been a huge buyer of treasuries for the reasons we just said.
• So what I’m saying is, is that the mere fact that the Fed is no longer doing this buying program, it is forcing yields upwards here in the US, particularly in that two- to ten-year maturity.
• On top of this, the advent that the Fed could have to be selling all these treasuries back into the market to withdraw that cash should pose interest rates going even higher than that.