How Do Federal Reserve Policies Affect the Supply of Money and Interest Rates?
Money supply can be eased or tightened by the Federal Reserve Board (aka the “Fed”) in response to economic conditions. This is done by adjusting interest rates, which make it easier or harder to borrow funds.The FOMCThe Federal Open Market Committee (FOMC) is the part of the Fed involved with money supply and interest rates. The FOMC meeds eight times a year and makes announcements right after each meeting.Discount RateThe Fed does not directly control the interest rate charged by commercial banks, but it strongly influences this rate through setting the discount rate. The discount rate is the amount of interest that Federal Reserve banks charge other banks for loans.Federal Funds RateThe Fed also controls interests rates by regulating the federal funds rate. The federal funds rate is the amount individual banks charge each other for short-term loans of reserve funds that are held in Federal Reserve banks.ReservesThe Fed also influences money supply by controlling the amount of reserv
