Federal Reserve System question?

Question

which one of these is not used by the Federal Reserve System to execute monetary policy...the discount rate, reserve requirements, open market operations, and the federal funds rate, or are they all used?

Answer 1

They are all used. However, open market operations and the federal funds rate are interrelated that they are both part of one option.

Open market operations, where the Federal Reserve purchases or sells U.S. Government securities on the secondary market, is the most flexible method for the Fed to implement its monetary policy. Whenever the Fed meets to discuss interest rates, it basically sets a target rate that it wants to achieve. The FOMC delegates responsibility for implementing U.S. monetary policy to the Manager of the System Open Market Account (SOMA) at the Federal Reserve Bank of New York. The FOMC issues a Directive to the SOMC that contains the rate at which the FOMC would like fed funds to trade over the intermeeting period. The FOMC’s announcements of changes in monetary policy thus specify the changes in the Fed's target rate.

Reserve requirements, a tool of monetary policy, are computed as percentages of deposits that banks must hold as vault cash or on deposit at a Federal Reserve Bank. Reserve requirements are the portion of deposits that banks may not lend. The Monetary Control Act (MCA) of 1980 authorizes the Fed's Board of Governors to impose a reserve requirement of 8% to 14% on transaction deposits (checking and other accounts from which transfers can be made to third parties) and of up to 9% on nonpersonal time deposits (those not held by an individual or sole proprietorship).

Federal Reserve Banks lend funds to depository institutions at the discount window. Strong, well-capitalized banks borrow under the primary credit program; other banks use the secondary credit program and pay a higher rate. The term "discount rate" usually is applied to the interest rate on primary credit available from the Federal Reserve. Under the program enacted in 2003, Reserve Banks establish the primary credit rate at least every 14 days, subject to review and determination of the Board of Governors. Reserve Banks may recommend adjustments in the rate on primary and secondary credit at their discretion, subject to the approval of Board of Governors. The revised program includes terms to facilitate a reduction in the primary credit rate in a financial emergency.Prior to 2003, the discount rate's importance as a tool of monetary policy was limited, because banks did little adjustment borrowing at the discount window. The effectiveness of the revised discount window lending program as a tool of monetary policy remains to be seen.

Answer 2

All. An interesting description of how the Federal Reserve is currently manipulating interest rates to holding up housing prices until the banks recover ( http://www.a2dvoices.com/realitycheck/markets/ ).