When the FED returns it's profits to the Treasury, what does the Treasury do with it?

[Think_Blue]

Earlier, strat2131 already answered some of your questions, but I will elaborate.

@philjohnston

So if the FED cancels the money when it sells securities there would be no inflation correct? I was unable to find information backing that up - do you have a link or a reference for that?

If the Fed sells securities through Open Market Operations, then there would be a monetary contraction of the base money supply, and in general would be deflationary, but this does not happen very often.

In reality, the Fed increases its balance sheet assets (Treasury securities) and corresponding liabilities (Federal Reserve Notes) over time, and thus in general is inflationary.

Here is a link about Open Market Operations:

http://en.wikipedia.org/wiki/Open_market_operations

Here is my explanation about how this works:

[url]Question about open market operations - #4 by Think_Blue]

@philjohnston

At the same time, what if the FED can’t find any buyers for the IOUs? What if they give more new money to the Treasury than general people are willing to buy? Would those 3 steps then continue to loop until the FED found a buyer for the IOU?

Then bond prices would fall, and bond yields would rise, until enough buyers are willing to buy.

@philjohnston

Lets assume that every time the FED buys an IOU from the Treasury that it is able to sell it and cancel the money it makes from that security. If that’s the case there would be no inflation (aside from fractional reserve lending) - and the government wouldn’t be able to print its own money like the a Monarchy as was previously stated.

Let me understand this. The Fed buys a Treasury security directly from the Treasury, and sells it on the open market? Then yes, there would be no increase to the base money supply.

But the Fed usually buys more securities then it sells, so it would rarely reduce its balance sheet assets.

@philjohnston

So if that is the case - why end the FED? Thats a perfect way to take money from Rich people willing to risk their money - and allow the government to use it for things they feel are necessary. Like the bailout for example. It wouldn’t be the taxpayers who pay - but rather the people who bought the securities from the FED. Correct?

I don’t understand your question.