![]() ![]() Rahman said he thinks the Fed at this point “is doing exactly what it should be doing,” although some believe the Fed should have taken action earlier. That’s how they entice people to buy the bonds in the first place: They sell those bonds at a discount,” Rahman said. “The supply is higher, so the value is lower. Beginning in June, the Fed started reducing its holdings by $47.5 billion a month, and upped it to $95 billion this month. So it’s been increasing the amount of bonds by offloading its balance sheet. What the Fed wants to ultimately do is twofold: “It wants to increase the amount of bonds out in circulation, it also wants to lower the supply of money in circulation,” he said. Rahman of Lehigh University said that if the Fed burned money or money was accidentally destroyed in a fire, it wouldn’t affect the bond market. Let’s go back to the bond market for a minute. ![]() We’re seeing signs that the housing market is cooling down, with existing home sales falling 0.4% and home prices rising at a slower pace than earlier this year. Right now, the 30-year fixed-rate mortgage is almost 6.3%, the highest rate since 2008, according to data from Freddie Mac. And that stops the circulation of money that would have been created through the loan, Ales explained. The Fed’s interest hikes make loans, like mortgages, more expensive. ![]() “That, in effect, basically reduces the money supply.” “By raising interest rates, people are less likely to borrow money,” said Alan Gin, an associate professor of economics at the University of San Diego. The other action the Fed can take is one that you’re likely familiar with since it’s happened five times this year: raising interest rates, That’s the nature of the trade,” said Ales. “It’s not stealing your money - it’s giving you something in return for it. These are loans that you are making to the government in return for interest payments. One is by selling you something, like Treasuries. The Fed can get money back in two ways, said Laurence Ales, an associate professor of economics at Carnegie Mellon University. “The Federal Reserve can’t simply confiscate money willy-nilly.” “That’s the real key to the goal of tamping down inflation,” he explained. “Sort of a big gesture of ‘We’re serious about inflation.’” But before creating such a bonfire, the Fed needs to buy the money back. “They could have a nice bonfire in front of the Federal Reserve building,” Rahman said. Sure, the Federal Reserve could do whatever it wants with the money it has in its possession, said Ahmed Rahman, an associate professor of economics at Lehigh University. Inflation rose 8.3% year over year in August in June it reached a 40-year high of 9.1%. If inflation is an issue due to too much money in circulation, why can’t just burn off money to offset inflation? Ever wondered if recycling is worth it ? Or how store brands stack up against name brands? Check out more from the series here. This is just one of the stories from our “I’ve Always Wondered” series, where we tackle all of your questions about the world of business, no matter how big or small. ![]()
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