Selling government securities drains reserves from the banking system and reduces the availability of credit, causing a decrease in the money supply. Ok… but now what actually happends if nobody wants to buys these government securities?
I wouldn’t say drains reserves and reducing credit leads to a decrease in the money supply… When the government conducts open market operations (ie: selling securities) they are decreasing the money supply in the economy, which ultimately leads to a reduction in the amount of money banks have to lend, thus decreasing the availability of credit and causing an increase in IRs. As for if nobody wants to buy them… just think of that as a scenario that doesn’t happen; what the Fed sells, banks always buy.
“As for if nobody wants to buy them… just think of that as a scenario that doesn’t happen; what the Fed sells, banks always buy.” Had an econ teacher that use to run the treasury dept of a large regional bank - When the fed is on the phone, banks do as they say.
^ that’s true, but not really the issue. The Fed isn’t selling bonds to reduce the money supply, they are borrowing money in the repo market with the bonds. Thus the Fed simply uses the bonds for collateralized loans, thereby taking loanable money out of the system. If there isn’t money available for repo loans, then it is very unlikely that the Fed would be conducting a contractionary open market operation. Edit: Note that the Fed is trying to decrease money for uncollateralized loans so it is very unlikely that there is too much money available for uncollateralized borrowing but too little available for collateralized borrowing. If the Fed actually bought and sold bonds for open market operations, then the open market operations would affect bond prices a lot. Since the Fed’s goal is to affect short term interbank lending rates and the money supply, this would be a bad side effect.