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Primary Dealers


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 Joe P
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(@Joe P)
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Thank you for your outstanding book.  I'm on the second read and have several questions.  I'll start with page 39 where you describe the FED buying a financial asset from a non-bank investor, with the investor's bank acting as intermediary.  On page 56 you say the FED conducts monetary operations exclusively through the Primary Dealers.  The example on page 39 is not facilitated by a Primary Dealer because it doesn’t fit the definition of monetary operations?

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(@josephfedguy-com)
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Thank you for your interest. Apologies for not being clear in the example - I will note it and clarify in the next version. 

All Fed purchases are done through primary dealers as an intermediary. So an investor doesn't directly sell it to the Fed, but to a primary dealer, who then sells it to the Fed. The Fed pays for the purchase using reserves it creates, but a non-bank investor cannot hold reserves (it doesn't have an account with the Fed). In that sense the commercial bank acts as an intermediary - in holding reserves rather than the sale of security. 

I have also written a detailed instance in how QE happens depending on counter-party type here. Please let me know if you have any more questions

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