Federal Reserve Operations And Market Impact

798 WordsMay 19, 20164 Pages
Federal Reserve Operations and Market Impact In order for the Federal Reserve to fulfill their goal of moderate long term interest rates, stable prices and maximum employment, they rely on developing strategic changes to the monetary policy. Through monetary policy changes, the Federal Reserve can either restrict or encourage economic growth and inflation, thereby molding the macroeconomy into a state of consistent health. Overall, there are three tools used to modify the monetary policy, they include reserve requirements, discount rates, and open market operations. In an effort to promote price stability within the economy, these tools influence monetary conditions by affecting interest rates, credit availability, money supply and security prices. While one tool is use more frequently than the others, all three are necessary in establishing stable economic conditions. Reserve Requirement The reserve requirement is a tool used by the Federal Reserve to adapt the monetary policy to their target range. Reserve requirements control the minimum amount of funds a depository intuition is required to maintain against their liabilities (Federal Reserve, n.d). Furthermore, the reserve requirement is usually tied into a ratio of transaction accounts the depository institutions holds. Consequently, a decrease in the reserve requirement allows institutions to hold less funds enabling them to loan out a greater percentage, thereby increasing the funds available within the

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