Where Does the Fed Get Its Money?

The Fed can acquire billions of dollars of assets with a simple accounting move.

   

One of our SlingShot Trader members asked us, “Where does the Fed get its money?” As you’ll learn, it’s not quite as complicated as one would think.

Video Transcript

The Fed literally creates it out of thin air. I illustrate what happens when the Fed buys Treasuries in the video, to show you how the Fed works with banks, which have a balance at the Fed. We’ll call them the banks’ reserves at the Fed.

The banks have Treasuries they’re holding, and the Fed credits the banks’ reserves. So, if a bank has $1 billion in reserves – and that’s a low number – and the Fed wanted to buy $1 billion worth of Treasuries, it would go to the reserves account and credit it an additional $1 billion. Then, the bank would give the Treasuries to the Fed, and it would go on the balance sheet for the Fed.

It’s literally an accounting change on the balance sheet that is recorded in the reserves for these banks. Now, the Fed doesn’t actually print the money, it doesn’t coin any new coins; all it does it make an accounting entry into the number of reserves that the banks have.

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