Federal Reserve Tools the Federal Reserve Has Essay

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Federal Reserve Tools

The Federal Reserve has certain actions it implements to help in the promotion of national economic goals and to influence the overall availability of money (Board of Governors of the Federal Reserve System, 2012). These actions make up what is known as monetary policy, which consists of three tools that the Federal Reserve uses to influence the economy with aims of pulling the economy out of recession. During a financial crisis such as that experienced in the United States in 2007-2008, The Federal Reserve was the only official body that had the power to make a real difference (Cecchetti, 2009). These three tools include open market operations, the discount rate, and reserve requirements (Board of Governors of the Federal Reserve System, 2012).

The main tool used by the Federal Reserve to influence monetary policy is open market operations. This tool entails the purchases and sales of federal agency and U.S. Treasury securities, with the objective of establishing a certain number of reserves at a particularly sought out price, which is known as the federal rates fund. This objective is a short-term aim that is established by the Federal Open Market Committee.

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The more recent objective of the Federal Reserve for open market operations has been long-term price stability and economic growth that is achievable and sustainable. This aim is continually assessed by the Committee through assessment of risks (Board of Governors of the Federal Reserve System, 2012).

Another tool utilized by The Federal Reserve to influence the economy and potentially improve the recession is the discount rate. This is the interest rate on loans from the Federal Reserve that commercial banks and other institutions are charged. The facility associated with the Federal Reserve through which lending occurs is known as the discount window. Regarding the discount window, there are three programs available to institutions including primary credit, secondary credit, and seasonal credit. Each of these types of credit have their own interest rate and all loans offered through the Federal Reserve Discount Window are secured loans. Primary credit is the main discount window program offered by the Federal Reserve, and it is always set….....

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