[Xist]

Originally Posted by JSH

It means the Fed is adding liquidity to the market. They are buying treasuries from banks (not directly from the Treasury in daily auctions) to pump money into the market and keep banks from hording cash and freezing up the system.

They did the same thing in 2008 / 2009. In late 2008 banks had a lot of assets but needed cash. The problem was nobody wanted to give up cash to buy the assets. So the Fed stepped in and bought those assets which pumped much need cash (liquidity) into the markets. Then when the economy got better they started selling off those assets (treasures, bonds, mortgages, etc) that they bought during the financial crisis back into the open market.

The European and Japanese central banks do the same thing.

JSH, were you discussing Quantitative Easing earlier?

Is Quantitative Easing Effective?
During the QE programs conducted by the U.S. Federal Reserve starting in 2008, the Fed increased the money supply by $4 trillion. This means that the asset side of the Fed's balance sheet grew significantly as it purchased bonds, mortgages, and other assets. The Fed's liabilities, primarily reserves at U.S. banks, grew by the same amount. The goal was that the banks would lend and invest those reserves to stimulate growth.

However, as you can see in the following chart, banks held onto much of that money as excess reserves. At its peak, U.S. banks held $2.7 trillion in excess reserves, which was an unexpected outcome for the Fed's QE program.

Most economists believe that the Fed's QE program helped rescue the U.S. (and world) economy following the 2008 financial crisis. However, the magnitude of its role in the subsequent recovery is more debated and impossible to quantify. Other central banks have attempted to deploy QE to fight recession and deflation with similarly cloudy results.

How The Fed’s Interest Rates Affect Consumers