How the Fed snuck billions of dollars into the economy

Last Thursday, I wrote about the Federal Reserve remarks that it would probably start to wind down the trillions in bond purchases it made during the quantitative easing stimulus program.

I explained that these bonds were purchased with fake money — money that was “printed” for the sole purpose of purchasing the bonds, which in turn kept interest rates exceptionally low.

I also explained the dilemma that the Fed now faced in what to do with those bonds. Can’t just throw them away — or burn them in a pile with Alan Greenspan’s biography as kindling.

I suggested that the Fed would be forced to “monetize” the bonds by turning them over to the Treasury.

This is seen as very inflationary by economists since it creates more money that people could spend on goods and services — which will drive up prices.

But it also will allow the Treasury to pay down some of the $20 trillion in US debt — which is also inflationary.

But there was one thing I left out of that column, and a reader named Keith Ryan, senior vice president of wealth management at UBS, pointed it out.

The Fed has actually already been monetizing “small” amounts of the interest income from the QE bonds by turning over its profits to the Treasury Department yearly. So billions of dollars of this fake QE money — interest on bonds bought with this newly printed money — have already flowed into the economy.

It hasn’t done much to help economic growth, with the nation’s GDP estimated to be rising at a less than 1 percent annual rate in the first quarter of 2017 after a gain of only 1.6 percent during all of 2016.

So far, all of this is just tinkering with the interest received on the bonds bought with QE money. It’s going to get a lot more interesting, and dangerous, when the Fed starts doing whatever it tries to unwind — that is, get rid of — the actual bonds it purchased.