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Question:


Why should I care about the Federal Reserve making open-market purchases?
-TomasEduardo


Answer:


I’m not sure that you should, in general. Open-market purchases are the mechanism by which the Fed manipulates short-term interest rates. If the Fed wants rates to rise, it limits its purchases of instruments like Treasury bills. That limits demand for short-term debt in the marketplace and forces sellers to offer their supply at higher rates to attract buyers. Conversely, the Fed can drive rates lower by buying lots of T-bills; the extra demand means that sellers can offer more miserly rates and still get rid of their paper.
 
This is business as usual. It’s how central banks operate all over the world. What has changed since the crisis of 2008 is the scope of the open-market operations. To try to stimulate the economy, the Fed has ratcheted up its purchases of government debt, forcing short-term rates down to just above zero percent, and it has printed money out of thin air to do it. So far there have been no discernible ill effects from this – and few positive ones, as economic growth remains tepid – but some economists and market commentators worry that all those extra printed dollars out there will result in inflation at some point. They could be right. That’s why, unlike in most situations, you should care.
-Conrad de Aenlle



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