he Tools used by the Federal Reserve Bank to Maintain Monetary Policy Goals
- The Federal Reserve Bank utilizes tools such as the discount rate, open market operations, interest on reserves and reserve requirements to control money circulation in the banking system.
- The interest rate imposed on banks by the Federal Reserve is called the federal discount rate.
- The Fed’s Board of Governors sets the discount rate to adjust money circulation in the baking system.
- Using monetary policy tools, the Fed solves economic issues such as inflation, unemployment, prices, and availability of loans from banks.
- When the economy has an excess supply of money, the purchasing value of money decreases, leading to inflation.
- Lending at the discount rate is one of the Fed’s primary monetary policy tools and is part of the Fed’s function as a lender of last resort
- The Fed is also called a standing lending facility because it allows banks to borrow all
they want at very short maturities to prevent undue bank failures.
- Banks facing increased liquidity needs or heightened risks can sometimes not raise the necessary funds in the open market.
- Fed discount lending serves as an emergency back up to give liquidity to the commercial banks in order to prevent them from failing once their interbank overnight lending system has been maxed out,
- The interbank rate, which is usually lower than the discount rate, is called the Fed funds rate.
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