What are the 3 primary ways that the Fed uses to guide the economy?

Question

I learned is school that the Fed uses 3 primary methods to "guide" the economy. (1) Raise or lower the Fed Funds rate (which is the rate banks pay to borrow money), (2) Raise or lower the Deposit Rate (Which is the percentage of deposit funds that banks must hold on hand in their vaults), and I can't remember (3)... Anybody know this last one?

Answer 1

The Three Instruments of Monetary Policy:

1) Open Market Operations
This is the purchase and sale of government bonds. When the fed buys bonds, it increases the monetary base and therefore the money supply. This puts money back into the economy to be used to purchase or invest in other things. They slow all this down (tightening the money supply) by selling bonds. Increasing the interest rate on government securities attracts money. This is what the fed uses the most since they have to continually buy and sell in order to keep the interest rate constant. Open-Market Operations are only conducted by the New York Fed Bank.

2) Reserve Requirements
This is a minimum reserve-deposit ratio. Increasing reserve requirements results in the raising of this ratio, thereby lowering the money multiplier and hence the money supply. Of course, the opposite is true for lowering the money supply.

3) Discount Rate
This is the interest rate that the Fed charges when making loans to banks. When banks find themselves short on cash to meet Federal Reserve Requirements, they borrow from the Fed through this Discount Window (rate) to make up the difference. The lower the rate, the more inclined banks are to “coming up short” at the end of the day since it does not cost them much compared to what they could be gaining from scraping the bottom of their reserve requirements. When this rate is relatively higher, banks are more inclined to keep more cash on hand so that they do not have to borrow, thereby decreasing the money supply.

Conversely, the Federal Funds Rate is the interest rate that banks receive on funds when lending them to the Fed overnight for other banks to meet their reserve requirements. Banks weigh this interest rate against their other short term alternative investments. The Federal Funds Rate is directly linked to the Open Market Operations conducted by the New York Fed Bank. When the Federal Reserve sets this "targeted rate," it applies to both Treasury Securities and the Federal Funds Rate on short term loans between financial institutions. This is why interest rates on short-term financial securities, such as Treasury Bills and Commercial Paper, roughly parallel the Federal Funds Rate.

The current targeted rate is 5.25% and the closing rate as of 03/07/07 was 5.22%. The Discount Window (or Discount Rate) is currently 6.25% for the Primary Credit Rate, 6.75% for the Secondary Credit Rate, and 5.30% for the Seasonal Credit Rate.

Answer 2

I would say the three most important methods of monetary policy are in this order:
1) Fed controls the monetary base. This is essentially how much cash the Fed injects into the economy that then expands the money supply.
2) Fed controls required reserve ratios. These are reserves (as a % of total deposits) that commerical banks must keep on hand at the Fed earning no interest. You mention this in "Deposit Rate".
3) Fed attempts to maintain an interest rate in the overnight interbank market for Federal Funds to meet those required reserve ratios, AKA Federal Funds Target Rate. The Fed tries to target this rate by buying and selling government bonds in the interbank market.

In the last 10 to 20 years the Fed has primarily focused all media and market attention on changes to the Fed Funds Target Rate, currently at 5.25%.

Hope this helps.

Answer 3

1)They control the interest rate on margin accounts-borrowed money to buy stocks.
2)Greenspan used word to move markets. See what happened Tuesday? He used the R word
3)They control The IRS to keep money valuable.
4)They keep all old Treasury bonds and collect interest on them.

Answer 4

we've a siphon named the Federal Reserve that sucks each and each of the money out of the commercial gadget. they say that via taking they're giving. this isn't uncommon or new reasoning. Communists suggested that via killing they were saving. Dictators say although warfare they carry about peace. Propagandists say that via lies they carry about truth. we've considered this reasoning earlier. via stealing they're giving? A loose market economic gadget does no longer have needed siphoning via particular hobbies on the accurate controlling the authorities.