The Federal Reserve Controls The Money Supply And Interest Rates

1055 Words Nov 30th, 2016 5 Pages
Traditional Tools
Monetary 356
Monetary policy concerns how the Federal Reserve controls the money supply and interest rates. To help control these factors the Fed has paid close attention to the Federal Funds Rate. This interest rate is one on overnight loans from one bank to another. This has become an important factor to consider because of its large impact on outside interest rates. Because of this, the FOMC announces its status nearly every meeting. In an effort to effectively manipulate the economy for the betterment of society several tools have been recruited including changes to open market operations, discount rates, reserve requirements, interest rates paid on reserves, and moral suasion.
Open Market Operations
Open Market Operations concern the Feds buying and selling of bonds in the open market. Buying and selling in the open market greatly affects the monetary supply and interest rates. Purchasing has been found to expand reserves, increase the money supply, and lower sort term interest rates. On the other spectrum, sales within the market prove to decrease reserves, shrink the supply of money, and raise short term interest rates. Using the supply and demand curve as a guide economic leaders find that purchasing in the open market causes the federal funds rate to fall, however, the opposite occurs when one sells in the open market. For example, following the housing crisis “the Federal Reserve greatly expanded its holding of longer-term securities through open…

Related Documents