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Wednesday, August 11, 2010

Layperson's guide to the Federal Reserve

Kevin Depew at Minyanville has authored, "The Real Person's Guide to the Federal Reserve", which should help set the record straight on what exactly was said in the most recent Fed release.

Here's an excerpt from Kevin's guide:

"Yesterday at 2:15 PM EST the
Federal Reserve released what to most of us normal people was a bunch of gibberish, including this:

"To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities."

In the aftermath of the financial crisis, most of us are now at least vaguely aware that the Federal Reserve has intervened in financial markets to "help support the economic recovery." But what, exactly does that mean, intervention? It's actually not that hard to understand, not as hard as you might think..."

Dig the explanation on the Fed's purchases of mortgage-backed securities and why these asset purchases are said to be closely linked with the stability of the financial system at the link above.

You might also want to check out this handy graph of "Credit Easing Policy Tools" from the Cleveland Fed's website (Hat tip: Prudent Investor).

Related articles and posts:

1. Caroline Baum: Economy lost momentum while I was pulling weeds - Bloomberg.