The Federal Reserve is considered an independent central bank who is still held accountable to Congress. Monetary Policy is a tool that the government uses in order to influence the economy. The FOMC (Federal Open Market Committee) can affect monetary policy by using three tools.
1. Open Market Operation- the buying and selling of U.S. government securities
2. Altering reserve requirements- the amount of money banks must hold when its customers deposit monies.
3. Adjusting the discount rate- the interest rate charged to commercial banks.
As of today the FOMC is changing interest rates to assist in inflation, intrest rates must change in order to make inflation better. A decision the FOMC makes for the good of our economy. Open Market is a way to influence the economy which is defined as the buying and selling of government securities. When the Federal Reserve feels the economy does not have enough money in the population they buy securities from members banks and increase the amount of money, if the Federal Reserve feels the economy has too much money in the population and want to regulate lower prices then they sell their securities back to the member banks.
Reserve Requirements is a percentage that commercial banks must keep when its customers are making deposits. The percentage of what the bank must hold per deposit may be changed at anytime by Central Bank. This can affect the economy by changing the money supply and credit conditions.
Adjusting Discount Rate- The final tool of Monetary Policy which is defined as a central bank is a lender of the last resort. The Federal Bank will make short term loans to commercial banks in its district. Discount rate adjusting is a commercial bank borrowing from the Federal Reserve Bank and giving them an IOU drawn against the paper and secured by acceptable collateral such as U.S. government securities.
Today’s banking system does not always deal with cash, especially to create new money. Money can be created by commercial banks when they loan money, when a person needs a loan to improve an...