The U.S. Federal Reserve controls the money supply in the U.S. and it is often described as “printing money” when it expands that supply.
The job of actually printing currency bills belongs to the Treasury Department ‘s Bureau of Engraving and Printing, but the Fed determines exactly how many new bills are printed each year.
When it is said that the Fed is “printing money,” the reference is really to the central bank increasing the money supply in the system , for example through quantitative easing (QE), an asset-buying programme.
The Fed and “Money printing”
Media folks often talk about “printing money” from the Fed, especially in the wake of the Great Recession. What they usually mean is that the Fed increases the money supply, most controversially through an asset-buying programme described as quantitative easing (QE).
Under this programme, the Fed bought several trillion dollars worth of financial securities from financial institutions, mostly U.S. government bonds, with the aim of pumping more money into the economy.
What Is Quantitative Easing (QE)?
Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank buys out of the open market longer-term securities to increase the supply of money and encourage lending and investment. Buying these securities adds new money to the economy and, by bidding fixed-income securities, also serves to lower interest rates. It also expands the balance sheet for the central bank.
The normal open market operations of a central bank, which target interest rates, are no longer effective when short-term interest rates are either at or approaching zero. On the contrary, a central bank may target specified amounts of assets to buy. Quantitative easing increases the money supply by buying assets with newly created bank reserves to give more liquidity to banks.
How Fed uses QE to creates money
Indeed, the Fed can create money “out of thin air.” More specifically, it does so with keystrokes on a computer. Its QE programme , also known as open market operations, illustrated this. That’s when a financial institution buys an asset from the Fed and pays it out with money that it simply creates.
Steve Meyer, a senior adviser to the Board of Governors of the Fed, explains how this is being done. “You might wonder how the Fed pays for the bonds it buys and other securities,” he says. “The Fed doesn’t pay with paper money. Rather, the Fed uses newly created electronic funds to pay the seller’s bank and the bank adds those funds to the seller’s account.