how does buying treasuries help credit?

how dies the fed buying up treasuries ease conditions in the credit markets? is it simply a way of prining money and effectively lowering inrterest rates ?

Simple supply and demand. If the Fed buys Treasury paper it is increasing demand for it, and in holding it decreases supply. That, in turn, raises the price, which lowers rates. Mortgages, as one example, are closely linked to Treasury rates, so you get consumer and business rates dropping. At the same time, as you've indicated, in purchasing the debt the Fed is putting more cash into the system.

i see. simple as that, thanks

This is a big consideration the Fed have right now (mortgage rates)... those who have mortgages have found the cost rise by far more than they had bugeted for... and there are still more who are locked into their honeymoon rate.

By reducing mortgage rates, the Fed will see less foreclosures, and an increase in new home sales (because mortgages are more affordable). Additionally, those with existing mortgages will have more disposable income which should help the economy along. I can't see any serious recovery from existing conditions until the housing market is back on it's feet.

The irony is, of course, that once all the QE is out of the way and we are seeing growth again, there will be so much money floating around that inflation will cause yields to rocket.

(all IMHO)

MrGecko said:

The irony is, of course, that once all the QE is out of the way and we are seeing growth again, there will be so much money floating around that inflation will cause yields to rocket.

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A lot of people are thinking that, but it depends a lot on how much debt the Treasury (and potentially the Fed) issues. If there is a huge amount of issuance then that will soak up the excess cash in the system. That would keep inflation in check, but of course the added supply will push rates up on a straight supply/demand basis.

thanks gents. could you recommend a decent book on basics of financial economics? I don;t want to do an MBA or anything, my studying days are over, but would like a good general overview ?

brut said:

thanks gents. could you recommend a decent book on basics of financial economics? I don;t want to do an MBA or anything, my studying days are over, but would like a good general overview ?

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Really this kind of stuff, for the most part is not in economic text books - read the FT and the financial Editorials - much more relevence

yeah - next time your out, go and buy yourself a copy of the Economist and read it over the weekend...