5 new wk assignments

Open market operations, the discount rate, and reserve requirements are the three instruments of monetary policy that the Federal Reserve uses (Federal Reserve Education, n.d.). According to the Board of Governors of the Federal Reserve System (2020), open market operations include “the purchase and sale of securities in the open market by a central bank—are a key tool used by the Federal Reserve in the implementation of monetary policy” (para. 1). The discount rate “is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility—the discount window” (Board of Governors of the Federal Reserve System, 2020b). Primary credit, secondary credit, and seasonal credit are offered to depository institutions with respective interest rates. “Reserve requirements are “the portions of deposits that banks must maintain either in their vaults or on deposit at a Federal Reserve Bank (Federal Reserve Education, n.d.). Open market operations is the most commonly used tool of monetary policy in the United States. All forms of monetary policy are important in their own respect, but open market operations is arguably the most important. The central bank buys or sells U.S. Treasury bonds, which serves to balance interest rates and bank reserves. This makes a huge impact on the rest of the financial landscape for the country and the world. The Federal Open Market Committee is tasked with making important decisions about open market operations. This committee is made up of “seven members of the Federal Reserve’s Board of Governors, which includes five voting members who are drawn on a rotating basis from the regional Federal Reserve Banks (lumenlearning, n.d., para. 5). Bernanke (2020) argues that “the new tools [quantitative easing and forward guidance] have proven effective at easing financial conditions when policy rates are constrained by the lower bound, even when financial markets are functioning normally, and that they can be made even more effective in the future” (p. 943). ============================================== The Federal Reserve also known as the Fed controls monetary policy for the United States, monetary policy refers to what the Fed does to influence the amount of money and credit in the U.S. economy. Likewise, the Fed strives to adhere to the dual mandate, which involves providing stabilization to the economy by maintaining stable prices and maximum full employment(The Federal Reserve’s Dual Mandate - Federal Reserve Bank of Chicago, 2020). The Fed influences the money supply and interest rates primarily through the use of open market operations and to a lesser extent by adjusting the discount rate and reserve requirements. Open market operations involve buying or selling securities that usually consists of short-term treasuries in an effort to control the fed funds rate and likewise the money supply (Monetary Policy Basics, n.d.). When the Fed injects money into the economy through the process of open market operations interest rates or the price of money is lowered, this is analogous with the notion that an increase in the supply of goods and services results in a lower price (Parkin, 2012). The Fed lowers the fed funds rate and the U.S. prime rate which follows the movements of fed funds in an effort to stimulate the economy. From a personal perspective, I work for a financial institution; many of our loan products are directly tied to prime or indirectly follow the trend of the prime rate. When the Fed lowers rates there is typically an increase in loan originations amongst financial institutions as borrowers want to take advantage of lower interest rates that likewise gives the respective borrower higher purchasing power(The Fed - How Does the Federal Reserve Affect Inflation and Employment?, 2020). Moreover, when the Fed sees possible economic slowdowns on the horizon, the lower rates jumpstart the economy (The Fed - How Does the Federal Reserve Affect Inflation and Employment?, 2020). These lower rates however are not without risk, keeping rates too low for too long can result in inflation or can possibly induce an asset bubble(The Fed - How Does the Federal Reserve Affect Inflation and Employment?, 2020). The economist John Taylor argues that the Fed keeping rates too low for too long in the period known as the “Great Moderation” was partially responsible for the 2008 Financial Crisis (Taylor, 2010). The Fed to a lesser extent also uses the discount rate and reserve requirements to influence monetary policy (Monetary Policy Basics, n.d.). The discount rate is the rate that the Fed charges other depository institutions on short term loans, whereas the reserve requirements is the amount of liquid reserves that depository intuitions must keep in their vault or in their account with the Fed(Monetary Policy Basics, n.d.). When the Fed lowers the discount rate, banks are able to borrow money from the Fed at a cheaper price and thus lend more funds out, whereas lowering reserve requirements is indicative of banks having to maintain a lesser liquidity position and likewise the ability to loan more funds out.