Recently reading the Wall Street Journal I came across an article that reported the intentions of the Federal Reserve to be more transparent to the public. The Federal Reserve is a government agency that controls the creation of money. There are essentially three ways by which it can exercise this power.
First, the Federal Reserve sets the minimum legal reserve requirement. The reserve requirement is the legal power to regulate the minimum fraction of deposits that banks must hold. Banks are free to hold more reserves but they are legally responsible to have at least the minimum required reserve.
Next, the Federal Reserve can set the discount rate for banks to borrow reserves. It determines the interest rates that banks must pay if they do borrow from the Federal Reserve. It is important to note that the Federal Reserve itself does not set interest rates in the open market. It sets the rates from which banks can borrow in order to meet the reserve requirements. Interest rates themselves are set by the market.
Third, the Federal Reserve engages in open market operations. This is the most frequently used method for changing the money supply. When the Federal Reserve participates in an open market operation, it buys or sells United States government bonds. These Treasury bills or Treasury bonds are issued by the United States Treasury in order to fund federal government deficits. When the Federal Reserve wants to increase the amount of money in circulation it uses currency to buy T-bills from private agents in the open market. On the other hand, a sale of bonds in the open market by the Federal Reserve decreases the money supply.
The main point of this article was that the Ben Bernanke wants these main actions to be more transparent.
No comments:
Post a Comment