How does the Federal Reserve implement monetary policy?
The Federal Reserve implements monetary policy using three major tools: • open market operations—the buying and selling of U.S. Treasury and federal agency securities on the open market; • discount window lending—lending to depository institutions directly from their Federal Reserve Bank’s lending facility (the discount window), at rates set by the Reserve Banks and approved by the Board of Governors; • reserve requirements—requirements regarding the amount of funds that depository institutions must hold in reserve against deposits made by their customers. Using these tools, particularly open market operations, the Fed influences the demand for and supply of balances that depository institutions hold on deposit at Federal Reserve Banks (the key component of reserves) and thus the federal funds rate—the interest depository institutions charge each other on overnight sales of required balances at the Federal Reserve. Changes in the federal funds rate trigger a chain of events that affect
The Federal Reserve implements monetary policy using three major tools: • Open market operations. The buying and selling of U.S. Treasury and federal agency securities in the open market • Discount window lending. Lending to depository institutions directly from their Federal Reserve Bank’s lending facility (the discount window), at rates set by the Reserve Banks and approved by the Board of Governors • Reserve requirements. Requirements regarding the amount of funds that depository institutions must hold in reserve against deposits made by their customers. Using these tools, the Federal Reserve influences the demand for and supply of balances that depository institutions hold on deposit at Federal Reserve Banks (the key component of reserves) and thus the federal funds rate–the interest rate charged by one depository institution on an overnight sale of balances at the Federal Reserve to another depository institution. Changes in the federal funds rate trigger a chain of events that a
The Federal Reserve implements monetary policy using three major tools: • open market operations—the buying and selling of U.S. Treasury and federal agency securities on the open market; • discount window lending—lending to depository institutions directly from their Federal Reserve Bank’s lending facility (the discount window), at rates set by the Reserve Banks and approved by the Board of Governors; • reserve requirements—requirements regarding the amount of funds that depository institutions must hold in reserve against deposits made by their customers. Using these tools, particularly open market operations, the Fed influences the demand for and supply of balances that depository institutions hold on deposit at Federal Reserve Banks (the key component of reserves) and thus the federal funds rate—the interest depository institutions charge each other on overnight sales of required balances at the Federal Reserve. Changes in the federal funds rate trigger a chain of events that affect
