Federal Reserve Will Pump Up Money Supply To Lower Interest Rates – FOMC Statement Includes MBS Purchase Numbers

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Federal Reserve Bank Washington DC

(Best Syndication News) As expected, the Federal Open Market Committee kept the federal funds rate the same but decided to purchase mortgage-backed securities and longer-term Treasury securities over the next six months. In January they lowered the fund rate to a range between zero and 1/4 percent. They really can’t go much lower than that, but they can manipulate the economy by pumping money into it.

By purchasing MBS and Treasury notes, the Fed puts money into the economy. If the Fed wanted to reduce the money supply they sell securities, but after looking at the unemployment numbers and factory output, they decided it would be prudent to do the opposite.

In a statement the Federal Reserve said they were going to “increase the size” of their balance sheet by up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year. They will also buy an additional $100 billion in agency debt bringing their total up to $200 billion.

The Fed also said they will purchase up to $300 billion of longer-term Treasury securities over the next six months. This should lower interest rates further.

The FOMC, the committee that meets several times a year to determine interest rates is made up of the board of governors and five Federal Reserve Bank presidents. There are currently two vacancies in the Board of Governors so there were only ten votes on the committee.

The President chooses the governors while the Senate confirms them. The bank presidents are picked by the individual Boards’ of Directors of the Regional Federal Reserve Banks. There are twelve banks and 12 bank presidents. The majority of Boards’ of Directors are chosen by the member banks like JPMorgan Chase, Bank of America and Citigroup.

All of the Fed bank presidents can sit-in and participate on the FOMC meetings, but only five can vote. The New York Fed President has a permanent seat on the FOMC while the other bank presidents rotate in and out. This gives the New York banks a stronger position.

Very few banks are large enough to become member banks, so only the national banks control the Federal Reserve and in turn the money supply and interest rates.

The Federal Reserve makes money literally. They print our money and then buy interest bearing securities – preferably government backed T-bills. The Fed then pays the member banks an annual 6 percent dividend from their profits.

Here is a list of governors and bank presidents who voted in this March FOMC decision:

Ben S. Bernanke, Chairman;
William C. Dudley, Vice Chairman;
Elizabeth A. Duke;
Charles L. Evans;
Donald L. Kohn;
Jeffrey M. Lacker;
Dennis P. Lockhart;
Daniel K. Tarullo;
Kevin M. Warsh; and
Janet L. Yellen.

The Fed said they will continue to monitor their balance sheet in light of evolving financial and economic developments.

By Dan Wilson

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