Federal Reserve and Treasury bonds

Posted at: 02/27/2013 5:23 PM
Updated at: 02/27/2013 5:41 PM
By: Ray Levato

The federal reserve appears to be "hooked "on the idea of buying U.S. Treasury bonds to help stimulate the economy, but it could eventually hit your wallet if it leads to a return of inflation

Ironically, the risk of inflation was raised this week by the Chairman of the Federal Reserve Board in comments made to Congress. Inflation eats away at the value of the dollar and the purchasing power of your money. So why is the fed buying all these bonds?

The Federal Reserve is the nation's central bank. The fed doesn't actually print money. The U.S. Treasury does that, but the system does allow the fed to kind of create money almost out of thin air. The fed does that by increasing the nations' money supply to buy treasury bonds to spur borrowing and investing. And that's what the fed has been doing since the great recession. This has helped to keep interest rates low. But some people worry, will inflation take off when the fed stops buying those bonds?

Financial analyst George Conboy uses another medical analogy to explain what's going on with the fed.
George Conboy, Brighton Securities, said, “With the Federal Reserve pumping extra money into the economy, it's a little bit like a patient who's taking an anti-biotic, it was very important at one time. It may still be a little important, but at some point, you begin to build an immunity to those drugs. And they begin to loose their effectiveness.  With the Federal Reserve, we're starting to see a loss of effectiveness.”

News10NBC had the chance to ask Senator Chuck Schumer should the fed start easing up on its policy of trying to simulate the economy?  He said no, that it's still necessary to create jobs.

Senator Chuck Schumer, (D)-New York, said, “Right now, inflation is very low. But we don't have enough jobs. The economy isn't moving along quickly enough and the middle class incomes are shrinking. So to me that is a higher priority right now. When the economy gets moving again at a decent rate later, they can shut it off.”

What was surprising this week is that Federal Reserve Chairman Ben Bernanke acknowledged in his remarks to Congress that continued buying of bonds in the open market could stoke the embers of inflation. Conboy says the danger is that inflation will come back  and that would not be good for the economy or you.

Conboy said, “Anyone looking to buy a home and get a mortgage has noticed that mortgage rates have begun to rise after a long decline. The rise in mortgage rates can be directly attributable to the excess action by the fed trying to put more money in the economy.”

The fed is buying $85 billion worth of U.S. Treasury bonds and mortgage-backed securities every month.  It's just coincidental, but that's exactly the number,  $85 billion  that would be cut in this latest government showdown that has the country in turmoil over defense cuts and lost programs.