Three Tools the Fed Uses to Influence the Direction of the Economy

Topics: Monetary policy, United States, Interest rate Pages: 1 (342 words) Published: October 7, 2012
In this paper I will analyze the three tools the Fed uses to influence the direction of the economy. I will also briefly discuss what the Fed should do to get the economy out of a recession. The United States economy has been in a recession for a while now. It appears that the United States govern body has spent a lot of time fighting and disagreeing at the extent of the tax paying citizens. The Federal Government uses three policy tools open market operations, reserve requirement, and discount rate. The United States Federal most vital and commonly used program tool is open market operations. The open market operations entail the selling as well as buying of government debt bonds etc., by the Federal Government. When the Fed’s decides to expand reserves, it purchases securities by making a deposit to the account sustained at the Fed by the primary seller’s bank. In the event the Fed decides to decrease, it sells securities and collects from the accounts. For the most apart the Fed doesn’t like to increase or decrease reserves perpetually, therefore it usually involves in transactions reversed within few days. By interchanging securities, the Fed impacts the amount of bank assets, which affects the federal funds rate, and/or the immediate lending rate at which banks have a loan of reserves from each other. The Federal funds rate is the interest rate the Fed targets with open market operations ( This is a very short-term interest rate that depends on the level of excess reserves present in the vaults of banks. By engaging in an expansionary policy, the Fed is using open market operations to buy bonds from the asset portfolios of some banks ( The Fed should pull together as one body to have a positive effect on the recession the United States is currently in. No matter what at the end of the day the common goal of creating jobs, uplifting, and strengthening the economy should be at the forefront of everyone’s mind!...
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