Reply #5: How Fed's plan to buy more gov't bonds will work (or won't)

[ozymandius]

THE MECHANICS:

• To buy Treasury debt, the Fed in effect prints money. It does so by expanding its balance sheet, which now stands at $2.3 trillion. The balance sheet has nearly tripled since the end of 2007. That's when the economy slid into recession and the Fed embarked on programs to loosen credit.

THE ECONOMIC MISSON:

• As the Fed snaps up Treasury bonds, the rates on those bonds will fall. Rates on mortgages, corporate debt and other loans pegged to the Treasury securities will drop, too. It involves supply and demand: Higher demand for bonds lowers their rates, or yields. And it drives up their prices.

• The Fed's goal is for those cheaper loans to entice Americans to spend more. Stronger sales could make businesses borrow and spend and hire more employees. Those forces could generate more business activity and strengthen the economy.

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If commodities such as oil and natural gas rise when the dollar falls (which is what The Fed is really doing) then doesn't it make sense that discretionary purchases would be cut?

Since this plan is focused on credit markets, how are the banks enticed to change their tight-fisted ways?