ECN 203 1st Edition Lecture 27Outline of Last Lecture II. Federal Reservea. FOMCb. Treasury Dept. III. Banks and Reserves a. Assets and Liabilities b. Reserve Systemsc. Reserve requirement and FDIC Outline of Current Lecture IV. Federal Funds Market V. Fed Funds Rate VI. Open Market Operations Current LectureLecture 3/30/15Implementation of Monetary Policy - Federal Funds Marketo The overnight loan market where banks borrow or lend reserves to or from another for the nighto The “shortest of short rates” - Federal Funds Rate o The interest rate paid for these overnight loans of reserves. o When the fed buys in the open market the effect of this is in the supply of available reserves in the banks which causes a fall in the federal funds rate. o The fed can raise or lower this rate which ultimately raises of lowers the long term capital market supply line because… The supply of reserves grows, the overnight rate borrowers have to pay for reserves to decrease. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. If the supply of reserves decreases, the overnight rate borrowers have to pay for reserves to increase. o The FOMC can increase or decrease the supply of reserves in the system by buying or selling gov’t debt paper from/to banks in the open market – which raises or lowers the Fed Funds Rate. - Open Market Operations o The primary monetary policy tool. This policy gets its name from the fact that the Fed buys and sells securities in the open market. o When the FOMC buys treasury bonds from the banks it puts more cash/reserves into thebanks. o If the banks are already holding reserves to cover the reserve requirement, these new reserves are excess reserves. o The Fed Funds rate decreases. o When the FOMC sells bonds to the bank it takes reserves from the bankso Which causes less reserves to be available overnight, meaning the Fed Funds rate increases. o By raising and lowering the target level of the Fed Funds Rate, the FOMC can increase or decrease the supply line of the
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