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I've been reading about Series I Savings Bonds on treasury direct. It seems that the return on an investment is given by the composite rate which is given by the formula:

Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)].

Right now, the fixed rate is 0%. In the past, however the rate was non-zero. I assume this rate is set by the Fed. What circumstances in the economy will cause the Fed to increase this fixed rate?

closed as off-topic by D Stanley, Dheer, JoeTaxpayer Jul 3 '17 at 17:58

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The Fed is trying to keep the money supply growing at a rate just slightly faster than the increase in the total production in the economy. If this year we produced, say, 3% more goods and services than last year, than they try to make the money supply grow by maybe 4% or 5%. That way there should be a small rate of inflation. They are trying to prevent high inflation rates on one hand or deflation on the other.

When the interest rate on T-bills is low, banks will borrow more money. As the Fed creates this money out of thin air when banks buy a T-bill, this adds money to the economy. When the interest rate on T-bills is high, banks will borrow little or nothing. As they'll be repaying older T-bills, this will result in less growth in the money supply or even contraction. So the Feds change the rate when they see that economic growth is accelerating or decelerating, or that the inflation rate is getting too high or too low.

  • Isn't it the other way around? The Fed creates money when a bank sells a bond to the Fed. In exchange the bank gets cash which goes into the money supply. – Nate Eldredge Jul 3 '17 at 14:24

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