The Fed can create money indirectly: It credits Primary Dealer bank accounts when it buys mortgage-backed securities; the profits thus earned allow dealers to finance the purchase of newly issued Treasury debt. The Treasury uses the cash it raised by selling paper to the Primary Dealers to pay its bills. The recipients of those payments deposit the money in their banks. Voila—the Fed has indirectly printed lots of new money.
But last week, the Fed actually printed money directly, even though Bernanke said he would not do that.
The Fed’s balance sheet shows that, last week, bank reserve deposits fell by $5.9 billion. In the “Other” column, $1.9 billion was withdrawn from their accounts at the Fed.
Foreign Official deposits were unchanged, leaving combined bank, foreign official and “Other” deposits down $7.8 billion. That covered the $7.8 billion increase in Treasury deposits. The Fed also increased its liabilities by printing $5.5 billion in Federal Reserve Notes (currency—a Fed liability), but reduced them by paying down $2.3 billion short-term borrowings via reverse repos. There were a few other minor items in both directors.
Meanwhile, the Fed’s assets grew by $4 billion, mostly from purchases of Treasuries. That equaled the net increase in liabilities, most of which came from the Fed’s issuance of that $5.5 billion in currency. So the Fed literally printing the currency it needed to fund its purchase of Treasuries on the Asset side of its balance sheet.
To read Lee Adler article: Yes, The Fed Is Printing Money
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