Why is the Federal Reserve Buying US Treasury Bills?
The Federal Reserve are buying 30 year Treasury Bills in an attempt to increase the money supply and stimulate economic activity. At the moment banks are reluctant to lend to the private sector. This is because the recession has made lending to private companies quite risky. Also, banks are reluctant to lend to each other because of the credit crunch. Banks are buying 30 year treasury bonds because they are seen as a safe investment. They may only yield 2%, but with interest rates at 0-0.25%, it does represent some profit for a bank; in addition it is seen as safe. Because the Fed is worried about deflation and lack of credit, they are trying to get the banks to resume more normal lending practices (lending to each other and lending to private sector. The Federal Reserve are buying treasury bonds because: • By buying bonds, the value increases and the interest rate on them declines. The Fed are trying to reduce interest rates on long term bonds to encourage banks to spend less money on
