馃彟馃挵 HOW DOES THE FED/TREASURY IMPACT ON THE MONEY MARKET? 馃挵馃彟
Copyright: Joel Padilla 2024
To talk about the US monetary system is a complex issue because there are many sophisticated mechanisms to control liquidity in the monetary market. However, understanding this will help to comprehend how the Western system works (and many countries included). This text will summarize the operation.
At first place, the FED [Federal Reserve] is the Central Bank (Bank of banks); its function is to control the monetary policy, banking supervision, provision of financial services and support to government. The Treasury is the agency that manages the finances of the federal government, executes fiscal policy, supervises banks, and prints currency. This entities impact on the money market.
The way that FED can inject money into the system is thanks to Quantitative Easing [QE] and Discount Lending. The QE means to buy financial assets and reduce interest rates. The way to reduce money into the system is thanks to Quantitative Tightening [QT] and Reverse Repo [RRP]. The QT means to sell financial assets and increase interest rates. The RRP is the interest rate the FED pays on reserves deposited with them by eligible counterparties through Reverse Repurchase Agreements (RRPs).
The way Treasury can inject money is with Expenditure (Social Spending, Repurchase of Bonds and Contracts), and the way to reduce it is thanks to Taxes and the Issuance of Bonds. This balance is called the Treasury General Account [TGA].
In fact, with the above information it can easily be explained what the FED's net liquidity is. It is the result of subtracting the RRP, the TGA and the Currency in Circulation, from the FED Net Credit. In other words, it could be Bank Reserves.
Of course, this only shows a small part of the liquidity and money. The impact of foreign capital through SWAPS, collateral or the private sector remains to be considered. In a world where deleveraging of the US dollar is imminent, commodities or patents could play a relevant role.
The best analysis is yours!
J. Joel Padilla
https://whatsapp.com/channel/0029Va9EHFk8fewujZelbM3t
https://www.linkedin.com/in/joelpadilla/recent-activity/
At first place, the FED [Federal Reserve] is the Central Bank (Bank of banks); its function is to control the monetary policy, banking supervision, provision of financial services and support to government. The Treasury is the agency that manages the finances of the federal government, executes fiscal policy, supervises banks, and prints currency. This entities impact on the money market.
The way that FED can inject money into the system is thanks to Quantitative Easing [QE] and Discount Lending. The QE means to buy financial assets and reduce interest rates. The way to reduce money into the system is thanks to Quantitative Tightening [QT] and Reverse Repo [RRP]. The QT means to sell financial assets and increase interest rates. The RRP is the interest rate the FED pays on reserves deposited with them by eligible counterparties through Reverse Repurchase Agreements (RRPs).
The way Treasury can inject money is with Expenditure (Social Spending, Repurchase of Bonds and Contracts), and the way to reduce it is thanks to Taxes and the Issuance of Bonds. This balance is called the Treasury General Account [TGA].
In fact, with the above information it can easily be explained what the FED's net liquidity is. It is the result of subtracting the RRP, the TGA and the Currency in Circulation, from the FED Net Credit. In other words, it could be Bank Reserves.
Of course, this only shows a small part of the liquidity and money. The impact of foreign capital through SWAPS, collateral or the private sector remains to be considered. In a world where deleveraging of the US dollar is imminent, commodities or patents could play a relevant role.
The best analysis is yours!
J. Joel Padilla
https://whatsapp.com/channel/0029Va9EHFk8fewujZelbM3t
https://www.linkedin.com/in/joelpadilla/recent-activity/
Copyright: Joel Padilla 2024
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