Why Are Banks Holding So Many Excess Reserves?

The Federal Reserve is the single entity in control of the monetary policy of the United State of America. Monetary policy is the process that the Federal Reserve takes in order to control the supply of money and to attempt the control the direction of interest rates. The reason for doing these actions is in attempt to control the country’s inflation and employment rates, which are the biggest indicators and factors of a healthy economy.

The Federal Reserve increases its reserves by issuing loans to a commercial banking system. This allows the bank that is borrowing reserves to disburse credits to the public. The Federal Reserve Banks offer primary credit, secondary credit, and seasonal credit, to bank organizations each with its own interest rate. Depending on if the Fed wants to decrease or increase the interest rate can be a positive or negative effect to the public. If the rate is decreases it encourages banking organizations to get more loans. When this is done the banks acquire more funds and are able to disburse more loans the people.

Using quantitative easing has helped the recovery of the USA and other developing countries. The Fed’s then limited their ability to pursue more measures, but congress ignored those appeals to help support the economy. The Fed’s decided to use smaller steps to help investor expectations and to prevent a possible financial crisis in Europe. In 2011 it was announced that the FED’s would hold short-term interest rates close to zero percent through 2013; to help support the economy. Soon after it was announced that using the “twist” operation would push long-term interest rates down, by purchasing $400 billion in long-term treasury securities with profits from the sale of the short-term government debt. Inaugurating a policy to help shape market expectations, which will raise interest rates at the end of 2014.

By law, the Federal Reserve conducts monetary policy to achieve its macroeconomic objectives of stable prices and maximum employment. The Federal Open Market Committee usually conducts policy by adjusting the level of short-term interest rates in response to changes in the outlook of the economy. Since 2008, the FOMC has also used large-scale purchases of Treasury securities and securities that were guaranteed or issued by federal agencies as a policy tool in an effort to lower longer-term interest rates and thereby improve financial conditions and so support the economic recovery (What).

When economists think of monetary policy implementation they primarily focus on instruments, operating targets, intermediate targets, and policy goals. Instruments are the variables directly controlled by the central bank(Flandreau, 2007). These contain, an interest rate charged on reserves borrowed from the central bank, the reserve requirement ratios that govern the level of reserves banks must hold against their deposit liabilities, and the composition of the central bank’s own balance sheet. The instruments of policy are employed to accomplish a

The Federal Reserve was established as the Central bank of the United States in late 1913. Commonly referred to as “the Fed,” it is responsible for managing currency, money supply, and interest rates (Lecture, 10/6). While the bank is given much autonomy over its actions, it is not independent from the US government in that the legislature is responsible for allowing the Federal Reserve to act freely, and elected officials appoint central bankers. These are two primary mechanisms for keeping the Fed in check, insuring that it is acting in the nation’s best interest (O, 286). Countries with central banks that are independent from their governments tend

The Federal Reserve System is the most powerful institution in the United States economy. Functioning as the central bank of the United States, acting as a regulator, the lender of last resort, and setting the nation’s monetary policy via the Federal Open Market Committee, there is no segment of the American economy unaffected by the Federal Reserve [endnoteRef:1]. This power becomes even more substantial in times of “unusual and exigent circumstances,” as Section 13(3) of the Federal Reserve Act gives authority to the Board of Governors to act unilaterally in lending and market making operations during financial crisis[endnoteRef:2]. As illustrated by their decision making in the aftermath of the 2007-2008 Great Recession,

The Federal Reserve exercises its power to stimulate stable employment economies and economic prices. The pursuit of the required employment rate and the creation of price stability, the Federal Reserve can increase or decrease the interest rate.

The Federal Reserve System was created by Congress in 1913 and passed the Federal Reserve Act in order to provide for a safer and more flexible banking and monetary system. According to the changing needs of the system, its objectives have been changing throughout the history of the Fed. At first, “its original purposes were to give the country an elastic currency, provide facilities for discounting commercial credits, and improve the supervision of the banking system under a decentralized bank.” (The Federal Reserve System, 1984, 1). Prior to its establishment (the Fed), the supply of bank credit and money was inelastic, thus resulting in an irregular flow of credit and money, and contributed to unstable economic development. These objectives were aspects economic policies and national monetary. However, through time, stability and growth of the economy, high employment levels, stability in the purchasing power of the dollar, and reasonable balance in transactions with foreign currencies have become to be recognized as primary objectives of the governmental economic policy.

The first tool the Federal Reserve has for influencing the economy is through the federal funds rate. This allows a change in interest rates which means that banks may have to pay a higher or lower interest rate to the Federal Reserve for borrowing money. If the rate is increased it slows down the economy because the cost for money and credit is increased as well, but if the rate is decreased the economy is more likely to grow because money then becomes more available for investment and growth. The second tool used to influence the economy is through the purchasing or selling of federal debt. Selling federal debt tends to slow down the economy because people are less likely to invest. Buying federal debt tends to help the economy grow by allowing

The federal government responded to the crisis that affected businesses and Industries many ways. The Federal Reserve has been most successful in its double full-employment, low inflation mandate when it relies on fixed rules, and keenly looks on the intermediate term rather than trying to respond to short-term developments under political pressure. A number of policies were resolved to react on the emphasis of intermediate term stability on the handling of the

This briefing is designed to cover several key economic concepts which will help prepare you for your upcoming debate regarding the Federal Reserve. The Federal Reserve is the central banking institution of the United States of America. Commonly known as “the Fed”, the Federal Reserve plays an extremely important role in the economy of the USA, and by association, the world. Created in 1907 following a severe economic crisis, the Federal Reserve uses a variety of tools to promote growth, reduce instability, and prevent crises in the American economy. In general, the Federal Reserve accomplishes these goals by using their influence to maximize national employment, control inflation and interest rates, and increase national GDP. Before we discuss the Fed in any further depth, we will first review some of these basic economic concepts that are essential for understanding how it operates.

The federal reserve system creates economic growth and stability. Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, stated in a speech at the World Affairs Council of Philadelphia saying, “[The] Federal Reserve's goal [is] of maximum employment and price stability, and, as I will explain, there are good reasons to expect that we will advance further toward those goals.” This being said, fluctuations in the interest rate causes adverse condition. When the interest rate goes down, it increases the money supply by making money less expensive, which allows member banks to borrow more money. When the interest rate goes up it decreases the money supply by making money more expensive, which in turn discourages borrowing and spending, slowing down the economy. Continual rate changes affect the entire economy. High interest rates causes the government to be limited in creating programs without the aid of the federal reserve. During the financial crisis, the Federal Reserve established several facilities to provide liquidity directly to borrowers and investors in key credit markets. As the production of financial markets enhanced, the Federal Reserve eased down these programs. In the attempt to dispense entrance to short-term debt funding, the Federal Reserve System effectuate a variety of crisis management

One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a

The Federal Reserve went into action in response to the 2008 recession by rapidly reducing interest rates with the hopes of encouraging economic growth. The federal funds target rate was decreased to between zero and .25 percent. The results of the rate changes caused what is called “zero bound”, this reduced the effectiveness of monetary policy with the near non-existence of interest rates.