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US Federal Reserve
US Federal Reserve

Lessons from the Fed’s $3 trillion money printing

  • The highest increase in the money printed happened during the weeks ending 25 March and 1 April, when the assets of the Fed went up by 12.6% and 10.6%, respectively
  • On February 26, the size of the Federal Reserve’s balance sheet was $4.16 trillion

Over a three-and-a-half-month period, the US Federal Reserve, the American central bank, has printed a little over $3 trillion in order to counter the economic impact of covid-19. What are the lessons to be learnt from this? Mint takes a deep dive.

How does the Fed put money in the economy?

The Fed prints money (or actually creates it digitally) and then uses that money to buy bonds. On February 26, the size of the Federal Reserve’s balance sheet was $4.16 trillion. By June 10, this had jumped to $7.17 trillion. Hence, over a period of three-and-a-half months, the Fed printed and pumped $3 trillion into the economy. This money was pumped into the economy by buying bonds from financial institutions. The idea behind putting money into the economy was to drive down interest rates and hope that people and businesses borrow and spend more, and in the process revive the American economy.

Source: Fed economic data
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Source: Fed economic data

At what rate has money been printed since Feb?

The highest increase in the money printed happened during the weeks ending 25 March and 1 April, when the assets of the Fed went up by 12.6% and 10.6%, respectively. Not surprisingly, on 23 March, the Dow Jones Industrial Average, America’s most popular stock market index was at 18,592 points, the lowest it has been in the last one year. Since then it has rallied close to 39%. The explanation for this lies in the fact that a portion of the easy money created by the Fed to supposedly drive down interest rates found its way into the stock market in America and across large parts of the world, including India.

What’s the Cantillon effect and how is it connected?

Richard Cantillon was an 18th century Irish-French economist. Cantillon observed that when the money supply increased in the form of gold and silver, it would first benefit the people associated with the mining industry. Along similar lines, the $3 trillion printed by the Fed seems to have first benefited those in financial firms, by driving up stock prices.

Has money printing helped the economy?

Jerome Powell, Chairman of the Federal Reserve clearly does not think so. At a recently held press conference, he said: “The extent of the downturn and the pace of recovery remain extraordinarily uncertain... A full recovery is unlikely to occur until people are absolutely confident that it is safe to re-engage in a broad range of activities. The severity of the downturn will also depend on the policy actions taken at various levels of the government to provide relief and to support the economic recovery."

What does Jerome Powell mean?

What Powell is basically saying is that there is only so much that a central bank can do in an uncertain environment like this, where so much demand has been destroyed. In the last one month, the Fed has gone slow on money printing and its balance sheet size has gone up by a mere 3.4%. Between this and Powell’s statement, the interpretation is that the ball is clearly in the government’s court now.

Vivek Kaul is the author of Bad Money.

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