DK
DK
May 17, 2019 · 2 min read

Hi Lucky,

Thanks for reading. It’s cool when people like it.

As for the Fed, I am not an expert on how each one of their mechanisms works in detail but briefly:

The main mechanism is that the Fed prints money and by lending it to commercial banks at the federal funds rate (the interest rate they always set). The lower that interest rate the lower the banks can offer loans themselves while still making a profit. The lower the interest rate on those loans to businesses or consumers, the more people borrow and the more people can buy.

More recently, the Fed has been much more direct in putting money into the economy by buying treasuries directly. Ie they conceive USD out of thin air and use them to buy the debt of the government thereby ensuring (1) that the government can spend on projects such as infrastructure and (2) that their set interest rated directly transmit into the market. The latter became necessary because, in the wake of the Financial crisis, when no one knew where the bad debts were located, banks did not lend each other money without a high risk premium as they could not trust each other. So while the fed rate was, say, 0.5%, banks only got access to capital from others at 6–7% making the transmission broken.

Anyways, this is very much in short and not the entire process. There is also the amount and kind of collateral that banks have to put up for loans from the Fed as well as the capital ratio the Fed requires them to hold that work in similar ways.

Hope this answers it in principle.

    DK

    Written by

    DK

    Entrepreneur, Fund Manager, Ex-Consultant and Hobby Ice Hockey Player. Child of the Sun. Any opinions personal, never investment advice, sometimes parody