It’s a common question, especially during times of economic uncertainty: Is the Federal Reserve just “Printing Money” to finance government spending by purchasing Treasury securities? The short answer is no, not in the way that term is commonly understood.
The phrase “printing money” typically describes a scenario where a central bank is directly and permanently funding government deficits by creating large amounts of physical currency. This isn’t the situation in the United States. Demand for U.S. Treasury securities remains robust globally, allowing the Treasury to finance deficits without undue difficulty. Furthermore, the growth of physical U.S. currency in circulation has been moderate in recent years. The Federal Reserve has also communicated its intention to reduce its securities holdings to a more typical level as the economy strengthens and the current accommodative monetary policy is adjusted.
While the Federal Reserve’s purchases of Treasury securities aren’t literally “printing money,” these actions do increase the reserve balances held by banks. When the Federal Reserve buys Treasury securities, it credits the accounts of banks, thereby increasing reserves within the banking system. Banks are required to hold these reserves.
Normally, an increase in these reserve balances would drive down short-term interest rates, both present and future. This, in turn, would typically stimulate the economy, encouraging bank lending and expanding the money supply. However, with short-term interest rates already near zero, further increases in reserve balances have limited power to push rates much lower. Consequently, the current high level of reserve balances hasn’t triggered significant inflationary pressures. Nevertheless, the Federal Reserve is actively monitoring inflation and inflation expectations and is prepared to use its policy tools to meet its dual mandate of price stability and full employment.
