wallstreetexaminer.com / by Lee Adler via The Daily Reckoning /
[This post is from Lee Adler. To find out more about his work – visit Wall Street Examiner by clicking HERE.]
This month the Fed is adding $23.4 billion in cash to Primary Dealer Trading Accounts in the period April 12-20. This is slightly more than the March addition of $21.9 billion, the smallest add since January 2016. It was a sharp decline from February’s $41.6 billion.
You may have thought Quantitative Easing (QE) ended in late 2014, and it did, but the Federal Reserve has continued to add cash to the financial markets every month. It does so via the purchases of mortgage backed securities (MBS). It calls them “replacement purchases.”
The Fed and Mortgage Backed Securities
The Fed is the bank for the banks, i.e. the central bank. It has resolved since 2009 to force trillions in excess cash into the banking system and make sure that that money stays in the system. It has also resolved to make sure that the amount of the cash in the system does not shrink. It does that each month via its program of MBS replacement purchases.
The Primary Dealers are selected by the Fed for the privilege of trading directly with the Fed in the execution of monetary policy. This is essentially the only means by which monetary policy is transmitted directly to the securities markets, and then indirectly into the US and world economies. The only means which the Fed uses in the transmission and execution of monetary policy is via securities trades with the Primary Dealers.