Thanks for the reply, James.

1. I believe the Fed’s administrative costs are paid for out of its own operations; that is, the Fed is self-financing. As a bank, it takes deposits from banks (on which, until recently, it paid zero interest) and it has assets with positive yields, like Treasury securities.

2. The Fed does not have a lot of control over longer-term Treasury yields. Over the past decade the yields on short-term Treasuries have been going up and down in response to changes in the target Fed funds rate, but long-term Treasury yields have been changing significantly less. That’s in part because when it comes to long-term Treasury bonds, the Fed is a relatively small part of the total investor pool. So the Fed’s ability to manipulate the price of US government debt is limited.

However … the Fed does have one weapon, which it does not want to have to use. That is, by making money very cheap, the Fed could increase inflation. Inflation would be good for the government debt, because the debt is fixed in nominal terms, and inflation makes the value of the debt go down. But the Fed does not want to use this weapon because inflation could have all sorts of nasty effects on the economy as a whole.

It is my understanding that FED employees are government employees and part of Treasury Dept. and that the salaries and other administrative costs are all hidden in several Federal agency budgets.

Where can i go to see real reports on the Fed spending on its own functions?

I have a question. Perhaps you or your informed readers could help me out. In the episode of American Life that you recommend, the presenters discuss Alan Greenspan’s low interest rate policy at the start of the decade. Greenspan took rates so low that the “global pool of money” abandoned treasuries and left for the relatively high yield of securities issued against US residential mortgages (MBS & CDO et al). What I don’t understand is how manipulating the Fed target rate effects demand for US treasuries.

Am I right in thinking that, during open market operations when the Fed is buying treasuries from the banks, it will actually be driving up the (discounted present value) price of treasuries through increased demand, and thus driving down yields? And that therefore, investor demand for US government debt decreases as interest rates come down (present day ‘flight to quality’ type situations excepted)? I’m unsure because in my copy of “Money, Banking & Financial Markets” I’m told that low interest rates increase demand for fixed-income investments, but I suppose the situation for fixed-income generally and risk-free, low-yielding, zero-coupon bonds specifically is very different.

A related question: how does the Fed target rate affect the US government’s ability to finance its debt? Could keeping rates low have benefits that might make up for the decrease in demand following reductions to treasury yields (maybe the US government borrows from commercial banks and can get better rates when LIBOR is low)?

Also in beginners series , if you could explain why US dollar value goes UP and DOWN? Who is controlling this? Also if you can explain how FOREX works and how countries like CHINA and India keep the FOREX at stable when ever their currency goes down or up?

Thank you,
Chandran…

http://www.mises.org/

But for an introduction, the video below is a great start.

Money, Banking and the Federal Reserve:

http://uk.youtube.com/watch?v=iYZM58dulPE

http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

My comment is probably better submitted to topics other than “Beginners” subject matter.