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It buys Treasury securities from banks and credits their accounts at the Fed.
By contrast, another round of quantitative easing, in which the Federal Reserve buys Treasury bonds or other debt instruments, would not help the deficit, but could help stocks.
While sliding stock prices early in the session were the main catalyst in lifting Treasury prices, the Federal Reserve also bolstered prices by staging a coupon pass, in which the Fed buys Treasury securities and adds permanent reserves to the banking system.
Besides, the Fed could just create the money the same way it does when it buys Treasury securities but let's come back to that one in a minute.
When China gets paid, the dollars go into its checking account at the Federal Reserve Bank, and when China buys Treasury securities, all that happens is that the Federal Reserve transfers the funds from their checking account at the Federal Reserve to their securities accounts at the Federal Reserve.
So when China buys Treasury securities, which we call going into debt to China, all that happens is the dollars they got from selling things to us that went into their checking account at the Fed, get shifted to their savings account at the Fed.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com