Why the Federal Reserve Buys Treasury Bonds

You might as the question: Why does the federal reserve buy treasuries? Isn’t that just taking money from one pocket and putting it in another?

The short answer to the latter is yes. 

Still, economists do present a few

reasons for the Federal Reserve to be buying treasuries:

1. In a recession and with falling velocity of circulation, the Money supply, adjusted for velocity of circulation, can signal deflation. Therefore buying Treasures and increasing money stock could reduce the threat of deflation in US.

2. Buying US treasuries should, in theory, reduce interest rates on bonds. Lower bond rates should have an effect on boosting spending and investment in long run.

3. Makes it easier to sell enough treasuries to fill the nearly $1.4 trillion fiscal deficit.

It should be remembered that creating money to buy US treasuries does nothing to create real output and there is a real risk of creating excess inflation.

The practice is an unconventional form of monetary policy. It's an attempt is to deal with unusually sharp decline in output and the much feared threat of a deflationary spiral.