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Monetary Policy - The Federal Reserve

The federal funds rate is an interest rate that banks charge each other when they borrow funds overnight to keep the Federal Reserve requirement met. The Fed uses the federal funds rate for controlling interest rates that banks charge for loans and pay for deposits. Banks would lend every dollar they have but the Federal Reserve requires that they have a certain percentage of deposits on hand each night. If the federal funds rate is higher, it causes the banks to be less able to borrow money to keep their reserves at the required level. In turn, the banks will lend out less money and the money that is lent out will be at a higher interest rate. When the loans become more expensive and more difficult to obtain, businesses will not borrow as much and this will slow the economy. Now if the federal funds rate is lowered, the opposite happens. Overnight lending will be cheaper so the banks will more than likely borrow from each other to maintain their reserves. Since the rate is lower, the banks will lend more and at a lower rate. Businesses will borrow more with the cheaper bank lending and expand, which will boost the economy.
             The discount rate is the interest rate that the Federal Reserve banks charge other banking institutions on overnight loans to borrow at the Feds discount window. This rate is higher than the federal funds rate because the Federal Reserve wants to discourage excessive borrowing. Banking institutions would better benefit to borrow amongst each other instead of borrowing directly from the Federal Reserve. The federal funds rate and the discount rate have remained the same over the past year for good reason. There is no need to alter the rates at this time because the economy is maintaining itself.
             The final tool the Fed uses for monetary policy is the required reserve ratio. The required reserve ratio is a percentage of deposits that the Federal Reserve requires each bank to keep on hand.


Essays Related to Monetary Policy - The Federal Reserve

1. Monetary Policy and the Econom

Monetary Policy and the Economy Using the tools of monetary policy, the Federal Reserve can affect the volume of money and credit and their price "interest rates. In this way, it influences employment, output, and the general level of prices. a a a a a a a a a a a a a a a THE FEDERAL RESERVE ACT LAYS OUT the goals of monetary policy. It specifies that, in conducting monetary policy, the Federal Reserve System and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest ... rates."" GOALS OF MONETARY P...

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  • Grade Level: Undergraduate

2. European Central Bank and the Federal Reserve System

... the Feds are to conduct the nation's monetary policy, to provide and maintain an effective and efficient payment system and to supervise and regulate banking operations. The Fed's most frequently used monetary policy tool is open market operations "the buying and selling of U.S. Government securities on the open market for the purpose of influencing short-term interest rates and the growth of the money and credit aggregates. Once the FOMC has established policy, the Federal Reserve ... Bank of New York implements the Fed's open market operations daily. Whenever an increase ... ...

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  • Grade Level: Undergraduate

3. Federal Reserve System

... of the Federal Open Market Committee (FOMC). Each part f the Federal Reserve: the Board of Governors, the FOMC, and the Reserve Banks all work together to achieve the FRS's three main responsibilities. The three responsibilities are: conducting monetary policy, supervising banks, and providing financial services. When these three powers work together the economy of the United States is well balanced and organized. The most important aspect of the Federal Reserve is its' use of monetary policy on the economy. Monetary policy refers to what the Federal Reserve ... does to influence the am...

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  • Grade Level: Undergraduate

4. THe Federal Reserve

... banks, and Edge Act and agreement corporations (the institutions that engage in a foreign banking business). Monetary Policy and Effects of on the Economy Using tools of monetary policy, the Federal Reserve can affect the volume of money and credit and their price-interest rates. In this way it influences employment, output, and the general level of prices. The Federal Reserve Act lays out the goals of monetary policy; the Federal Reserve System and The Federal Open Market Committee should seek "to promote ... effectively the goals of maximum employment, stable prices, and ... ...

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  • Grade Level: Undergraduate

5. Monetary Policies of the FRB, ECB, and Bank of Japan

... is to regulate the purchasing power and price stability of the euro. A difference between the ECB and the Federal Reserve is that the ECB solely focuses on the currency issues whereas the Federal Reserve will focus on issues regarding other economic issues such as unemployment. After the collapse of Lehman Brothers, the ECB also resulted in unconventional monetary policy, in addition to convention policy, to try and revive the struggling economy. The conventional monetary policy used by the ECB is changes ... in the interest rates, which was ... ...

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  • Grade Level: Undergraduate

6. The Fed

... not without many drawbacks (Melton 140-144). The Federal Reserve, which carries out monetary policy, is free of direct political influence. But it is not totally without influence because the president appoints, pending the approval of the Senate, the 7 Board of Governors as their terms expire. Congress structured the Fed to be independent within the government. That is, although the Fed is accountable to the Congress, it is insulated from day-to-day ... pressures. This reflects the conviction that the people who control the country's money supply should be independent of the people who...

  • Word Count: 2739
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  • Grade Level: High School

7. The Effectiveness Of The Monetary Policy Of The Federal Reserve

The effectiveness of the monetary policy of the Federal Reserve Our nation's central bank, known as the Federal Reserve, is responsible for conducting the US monetary policy. One of the main responsibilities includes regulating the money supply in order to keep production, prices, and employment stable. In order to manipulate the money supply, the Federal Reserve uses three tools: the reserve requirement, open market operations, and the discount rate. Reserve requirements are percentages of deposits that banks may not lend and must hold as ... supply, however, as with anything, the monetary p...

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8. The Federal Reserve System

... of Governors of the Federal Reserve System. The Federal Open Market Committee, consisting of the seven members of the Board of Governors and five members elected by the Federal Reserve banks, is responsible for the determination of Federal Reserve Bank policy in the purchase and sale of securities on the open market. The Federal Advisory Council, whose role is purely advisory, consists of 12 members if the meet membership qualifications. The Federal Reserve System "conducts monetary policy using three major tools:" 1. Reserve Requirements 2. The discount rate ... is all I can say. I hop...

  • Word Count: 1833
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  • Grade Level: High School

9. The FED

... its own organization, and by tradition it elects the Chairman of the Board of Governors as its Chairman and the President of the New York Bank as its Vice Chairman. The Board sets reserve requirements and shares the responsibility with the Reserve Banks for discount rate policy. These two functions plus open market operations constitute the monetary policy tools of the Federal Reserve System. In addition to monetary policy responsibilities, the Federal Reserve Board has regulatory and supervisory responsibilities over banks ... that are members of the System, bank holding companies, int...

  • Word Count: 1432
  • Approx Pages: 6
  • Has Bibliography
  • Grade Level: High School

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