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To: Hawkmoon who wrote (88745)	9/11/2007 11:15:46 AM
From: Moominoid	Respond to of 306849

I think it is relevant. John Hussman argues for one that the Fed just reacts to the market interest rates on government and private debt in targeting the Federal Funds rate. Economists like Bernanke obviously think that the Fed is more in the driving seat. There probably isn't one clear black and white answer to that.

To: Hawkmoon who wrote (88745)	9/11/2007 4:59:39 PM
From: GraceZ	Respond to of 306849

Because that's what the Government does when it issues debt.. It creates money backed by the full faith and credit of the American people Selling new government debt takes money out of the money supply. It takes it out of the commercial banking system and transfers it to the Treasury, same with tax receipts (your check to the IRS removes money from a commercial account transferring it to the Treasury and the Treasury doesn't keep its money in B of A). That money gets recycled into commercial banks when the government then spends that money. Likewise, as you say below, when the Fed wants to remove money from the money supply they sell bonds that they hold. All the Fed does to influence money supply is buy (inject) or sell (drain) government debt When the Fed uses open market operations, temporary to defend the FF rate, or permanent to increase the money supply they use the market for government bonds because their buying and selling has little effect on the price or supply of government securities, almost none. The daily market for US Government bonds is huge, liquid and wide. The Fed could use any type of bond or asset to add temporary reserves, their checks get deposited in a commercial bank, there is no call on any other commercial bank as their would be if you or I bought a bond and this automatically adds cash reserves to the system. The problem with using other types of assets is that those markets aren't sufficiently large enough for them to conduct operations without effecting prices in those markets. Their buying has no effect on the market for government debt because the size of the market for government debt is just so large.