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Fed watch • Credit creation, cause & effect • June 15, 2022 (Feedback requested)
(1) The Federal Reserve buys and sells securities and (2) sets interest rates to influence: (3) borrowing costs, (4) lending activity, (5) inflation and employment; (6) with varying effects.

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TLDR: Last week, the Fed trimmed $711m net from its Treasury security holdings and added $9.2bn net to its mortgage-backed security holdings. The total amount of Reserve Bank credit increased by $12.3bn net.
  • The 10-year Treasury yield rose by 30bp to 3.33%
  • The 30-year fixed-rate mortgage rose by 55bp to 5.78%
  • The market expects the federal funds rate to hit 350-375bp by year-end
  • I am trying to make the data easier to understand, more practical, and more straightforward. Please look, compare it to past formats, and give me your feedback.

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1/ The Federal Reserve buys and sells securities

2/ And sets interest rates


3/ To influence: borrowing costs


4/ Lending activity


5/ Inflation & employment


6/ With varying effects




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Why is this gobbledygook relevant?
The Federal Reserve creates money and uses it to buy bonds. They do this to push interest rates down and to put more money into the economy. Low rates mean people can borrow more, spend more, and afford higher prices. More spending and higher prices mean people feel rich, and businesses hire new employees.

But, if prices rise too quickly or people borrow too much, the Fed does the opposite. It sells the bonds it has and then destroys the money it receives. These sales push interest rates up and take money out of the economy. Higher rates mean people can't borrow or spend as much and must pay lower prices. It makes people feel poorer than before, stops them from being able to spend as much, and makes businesses trim employment.

In addition to this, the Fed borrows and lends to banks. If a bank doesn't have enough money for a day or two, it can borrow from the Fed. If it has too much, it can lend to the Fed. A group of people who work for the Fed, the Federal Open Market Committee (FOMC), decide the interest rate that the Fed will pay for, or demand of, these short-term loans.

The Fed does these because they believe in two objectives: first, a low and stable inflation rate is good for the economy, and second, that minimising unemployment is desirable.

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