What will happen to the Fed if the national debt is paid off? Could the Fed buy precious paintings in the open market, instead of using Treasury debt to implement monetary policy?

March 2001

Yours is a most timely question, one that is of particular interest to the Federal Reserve System!

Treasury Securities: Monetary Policy Tool

The Fed's primary tool for implementing monetary policy is to buy and sell government securities in the open market. When the Fed buys (sells) U.S. Treasury securities, it increases (decreases) the volume of bank reserves held by depository institutions.1 By adding (subtracting) reserves the Fed can put downward (upward) pressure on the interest rate on federal funds - the market where banks buy and sell reserves, mostly on an overnight basis. For additional information this subject, you may wish to review the chapter on open market operations, in The Federal Reserve Systems Purposes and Functions. This publication is available online at: http://www.federalreserve.gov/pf/pf.htm.

Treasury Securities: Fed Portfolio

Not only do open market operations affect conditions in the federal funds market, they also affect the amount of U.S. Treasury debt the Federal Reserve holds. As of January 31, 2001, the Federal Reserve Banks held $516 billion dollars in U.S. Treasury securities. The Fed's portfolio of Treasury debt is its primary source of income; it earned $32.7 billion in 2000. Approximately $25.3 billion of the Federal Reserve Banks' income was distributed to the U.S. Treasury as interest on Federal Reserve Notes.2