THE FEDERAL RESERVE: Monetary Policy. MODULE 27. OBJECTIVES OF MONETARY POLICY. The Fed’s Board of Governors formulates policy, and the twelve Federal Reserve Banks implement policy.
THE FEDERAL RESERVE: Monetary Policy
CONSOLIDATED BALANCE SHEET OF THE FEDERAL RESERVE BANKS
The Fed’s balance sheet contains two major assets:
Securities which are Treasury Bills (bonds) purchased by the Fed from commercial banks, and
Loans to banks.
The balance sheet contains three major liabilities:
Reserves of banks held as deposits at Federal Reserve Banks,
US Treasury deposits of tax receipts and borrowed funds, and
Federal Reserve Notes outstanding, the paper currency.
THREE MAJOR “TOOLS” OF MONETARY POLICY
Open market operations,
The reserve ratio, and
The discount rate.
4. Changing the reserve ratio is very powerful and could create instability, so the Fed rarely changes it. The last time it was changed was in February 1992, when the ratio was lowered from 12 percent of demand deposits to 10 percent, at which level it continues.
“Easy” monetary policy occurs when the Fed tries to increase the money supply by expanding excess reserves in order to stimulate the economy (expansionary policy). The Fed will enact one or more of the following measures:
“Tight” monetary policy occurs when the Fed tries to decrease money supply by decreasing excess reserves in order to slow spending in the economy during an inflationary period (contractionarypolicy. The Fed will enact one or more of the following policies: