How Does the Fed “Print Money?”

With the Fed’s announcement today, many people may be wondering “How does the Fed print money?” Here is a snippet from my Daily Piece on Currencies.

Most of the time when we say that a central bank “prints money” that does not mean that they actually fire up the electronic version of a printing press. They can and this is the way Bernanke described it in 2002 when he said that “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

However more often printing money means that the Federal Reserve will hold an auction to buy assets like bonds or mortgage backed securities from banks. Then they issue a credit to the bank’s account, creating new money and the hope is that the bank will use the money to lend to businesses and consumers.

Unfortunately by increasing the supply of dollars, each dollar is worth less. The U.S. government also increases its debt burden, raising concerns for foreign investors. This is compounded by the fact that the Fed’s purchases of Treasuries will drive down bond yields, reducing the attractive of dollar denominated investments.



  1. kathy,

    I’m still a greenhorn in FX…intuitively, I thought when govt buys treasuries, they need USD to buy, hence pumping up demand for USD and USD should strengthen. Did I get this wrong? Thks

  2. Kathy,

    You’ve got it a bit off there.

    The Fed increases money supply buy purchasing Treasury debt (and other debt like MBS and Agency paper) from the market – debt comes in, cash goes out. They don’t first buy, then sell. That would make the process much less efficient and effective. When they want to reduce money supply they reverse the process.

    John Forman
    Senior FX Analyst – IFR Markets
    Author – The Essentials of Trading

  3. Actually, when the Fed buys back treasuries it is lowering the deficit and inflating the money supply. This is called dumping debt! It does weaken the dollar and drive investors away from treasuries and into risk asset, such as equities. Ford is taking advantage of this situation by issuing 3 billion in corporate bonds also backed by TALF.

    Brillant move Helicopter Ben. It sparks a race to the bottom, Europe will have to capitulate now!

  4. thx, Mattia!

    I believe in Chris Martenson’s message so much I contributed $ to help him spread the word. He’s spent the last 5 years of his life developing this material that he then offers for free. a hero…

    here’s some chapter titles and playing times:
    # Chapter 1: Three Beliefs (Time: 1:46)
    # Chapter 2: The Three “E”s (Time: 1:38)
    # Chapter 3: Exponential Growth (Time: 6:20)
    # Chapter 4: Compounding is the Problem (Time: 3:06)
    # Chapter 5: Growth vs. Prosperity (Time: 3:40)
    # Chapter 6: What is Money? (Time: 5:55)
    # Chapter 7: Money Creation (Time: 4:19)
    # Chapter 8: The Fed – Money Creation (Time: 7:13)
    # Chapter 9: A Brief History of US Money (Time: 7:14)
    # Chapter 10: Inflation (Time: 11:48)
    # Chapter 11: How Much Is A Trillion? (Time: 3:28)
    # Chapter 12: Debt (Time: 12:32)
    # Chapter 13: A National Failure To Save (Time: 12:06)
    # Chapter 14: Assets & Demographics (Time: 13:41)
    # Chapter 15: Bubbles (Time: 14:10)
    # Chapter 16: Fuzzy Numbers (Time: 15:52)
    # Chapter 17: PART A: Peak Oil (Time: 17:52)

  5. Banks own bonds and other assets. To get these Bonds and other assets on the bank’s balance sheet the bank had to take cash and pay for those bonds; i.e they are just swapping cash that they get from stock holders or from depositers. Ok so you are saying above that the Fed creates money out of thin air by purchasing these Bonds from the banks. Don’t see money being created..I just see cash being given back to banks so they can lend it out. (can’t lend out a bond)

    Is there a better way to explain how the Fed “Prints money”??

  6. To CONTINUE: when I hear talk about the Fed “printing money” I think of them typing on their keyboard and transferring electronically, funds into one of their bank’s accounts. ( There is No transferring of Treasury bills back to the Fed); this is what I think of when I hear “creating money out of thin air” or “Printing money”. Just Money or cash going one way to the Bank. Is the Fed electronically typing in money into their Banks without actually having the money in the Fed’s account? Is this what is going on and is this “Printing money”? (Cash going from Fed to Bank without any asset going back to Fed)


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