Chapter 15 – Tools of the Federal ReserveThe Market for ReservesDevelop graph here.Open Market Operations and the Market for ReservesDevelop graph here.Discount Loans and the market for reservesDevelop graph here.Changes in reserve requirements and the impact on the market for reservesDevelop graph here.Changes in the interest rate on reserves and the market for reservesDevelop graph hereConventional Monetary Policy Tools—work on the short-term interest ratesOpen Market OperationsDynamic – permanent to change target fed. Funds rateOutright purchase to lower target rateOutright sale to raise target rateDefensive – temporary to maintain target fed. Funds rateRepurchase agreement – Fed purchases securities with an agreement to resell at specific dateMatched sale purchase agreement – Fed sells securities with an agreement to buy back at a specific dateOpen market operations are used most often by the Fed to conduct monetary policy. They are fast, flexible, and completely controlled by the Fed.Discount PolicyTypes of loans available at the discount window- Primary credit – healthy banks overnight - Secondary credit – financially troubled banks pay a higher interest rate- Seasonal credit – limited to banks in vacation and agricultural areasAdvantage of discount policyFed can perform lender of last resort functionDisadvantage of discount policyNot completely controlled by the FedReserve requirementsCan be set between 8% and 14% at the Fed’s discretion. Could be raised to 18% if needed.AdvantageImpacts all banksDisadvantageLess effective today because of financial innovationsCan cause liquidity problems for some banksCreates uncertainty and makes liquidity management more challengingInterest on ReservesCan be used to change short-term interest rates particularly if banks are holding large amounts of excess reservesNonconventional Monetary Policy Tools used duringthe most recent Financial CrisisLiquidity Provision- Expansion of the discount window- Term auction facility- New lending programsAsset Purchases- Purchases of mortgage-backed securities- Purchases of long-term Treasury securitiesCommitment to future monetary policy actionsTry to impact interest-rate expectationsConditional statements or unconditional
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