Fed Should Raise Reserve Requirements Term Paper

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The Fed's assets will also increase due to the strong dollar globally stabilizing it as a trading currency with leading partners including China. All of these factors will lead to a stronger asset base for the Fed.

7. The Fed will keep from selling these assets if the dollar does not gain in strength relative to other currencies globally, and would also not sell them if the economy did not reach a growth level that would ensure excess reserves were not needed.

8. Reverse repos are when "the Fed lends securities to banks in exchange for cash for a set period. At maturity, the securities are returned to the Fed, and the cash goes back to the primary dealers. By doing this repeatedly, the Fed can contract the money supply "(Calomiris, a.15.). The author says that in large financial transactions involving reverse repos the effects are unknown and therefore unreliable.

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It is a means to slow down money supply in an attempt to curb inflation. This technique is fraught with challenges however, as the Fed seeks to control money supply without causing a recession, while trying to control for inflation.

9. The Fed could rely on a variety of different strategies for encouraging banks to not lend. The first is intensive use of reverse repos. The second is raising the rates of borrowing, and the third, setting very high reserve requirements.

10. A higher federal reserve requirement makes sense from a regulatory standpoint of minimizing inflationary risk by using excess reserve requirements. It is also highly effective for managing money supply and interest rates, while assuring the nations' banks have a sufficient reserve to alleviate the potential of credit defaults on the part of businesses and consumers.

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