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To: Bill Harmond who wrote (39987)2/14/1999 10:51:00 PM
From: Curlton Latts  Read Replies (2) of 164684
 
>>>>The Fed uses open market operations. They increase the money supply by buying treasury bills in the open market thereby putting more dollars into circulation, and they decrease the money supply by selling them and taking the cash back in.<<<<<

Almost Bill.

I think you got it backwards. TBills are a part of M1 and therefore counted as part of the money supply. As such, money supply is unchanged when the Fed buys back TBills in exchange for cash currency. Where there was cash there is now TBills and in the reverse where there was TBills there is now cash. That is ZERO sum with respect to money supply with some impact on liquidity in the markets. However, where the increases and decreases to money supply come in from Fed open market operations, is from the interest on the TBills issued or retired.

The increase or decrease to the money supply actually arises from the interest paid on TBills from the Feds open market operations. So for example if the Fed does a $10 billion sale of one year TBills with a 3.5% coupon, in effect they are increasing the money supply by 3.5% of $10 Billion over that one year period. Conversely, if they were to buy back those TBills that 3.5% increase in the money supply wouldn't happen.

So you had it right - only backwards. Selling TBills increases the money supply not buying TBills and vice versa.

Incidentally, the Fed can also impact the money supply by changing Fed reserve requirements and regs at the money center banks.

Good Luck To Each And All

Curly

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