Answer to Question #60807 in Finance for Eric Johnson

Question

Is any or some of the borrowing by the U.S. Treasury via the issuance of treasury securities used to capitalize the lending operations by the Federal reserve? I'm not asking about open market operations whereby the fed purchases/sells securities, I'm talking about does the Treasury direct capital raised from security issuance to the Fed to capitalize lending? In other words, if the Treasury were to borrow 100 billion and accrue 1.4 billion in interest owed, why the hell doesn't the Fed just lend 100 billion and generate 1.4 billion in interest earned so that taxes are never required to service the debt? Shouldn't this be written into law? What am I missing here?

Answer 1

The borrowing by the U.S. Treasury via the issuance of treasury securities may be used to capitalize the lending operations by the Federal reserve. So, the Treasury direct capital is raised from security issuance to the Fed to capitalize lending. That's why the Treasury were to borrow 100 billion and accrue 1.4 billion in interest owed, but the Fed can't just lend 100 billion and generate 1.4 billion in interest earned so that taxes are never required to service the debt.