Federal Reserve: Able To Implement Tools To Balance The Economy

The Federal Reserve maintains the ability to implement tools in order to balance the economy. These include controls based on banks or operations that the Reserve itself takes part in. All have the same goal, maintaining a balance in our economy and preventing catastrophes like the Great Depression from occurring again. The three tools that the Fed is able to implement are reserve requirements, interest rate controls, and open-market operations.

The first of these tools, reserve requirements, are implementations on banks that require a percentage of its deposits to be held within the Federal Reserve. A high requirement means that banks have less money to invest or loan because a larger portion of their deposits are being held. This decreases the money supply in circulation. Conversely, a low requirement permits the money supply to expand. This standard for how a bank is allowed to operate creates stability within the economy.

The second strategy implemented is the control of two types of interest rates: discount rates and the federal funds rate. The Fed is a bank that loans money to smaller commercial banks for use. The discount rate is the interest rate collected on these loans. If there is a need to decrease the money in circulation,

These operations are made up of the buying and selling of Treasury notes and bonds on the open market. In buying these securities, the Fed credits the seller's bank account and puts more money into circulation. The opposite occurs when the Fed sells their securities. The sale of them creates a way for the government to raise funds for itself and it decreases the money supply. Investors have an extra incentive to buy these as they are considered fairly risk-free and highly liquid. The participation of the Fed in the open market allows additional upsides for both parties outside of merely controlling the supply of