What Assets Should the Federal Reserve Buy?
FRB Richmond Economic Quarterly, vol. 87, no. 1, Winter 2001, pp. 7-22
16 Pages Posted: 2 Dec 2012
Date Written: November 29, 2012
The Fed's asset acquisition practices should adhere to two closely related principles that would support monetary policy by strengthening the Fed's independence: asset acquisition should respect the integrity of fiscal policy and minimize the risk of political entanglements involving Fed credit allocation. Restricting Fed assets to Treasury securities conforms well to both principles. By extending its credit to the Treasury, the Fed minimizes its participation in private credit markets and transfers directly to the government all the revenue (net of the Fed’s operating expenses) from money creation. The authors propose that the Fed and the Treasury cooperate, under the auspices of Congress if need be, to enable the Fed to continue to rely on Treasury securities even as the publicly held debt is paid down.
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