Summary: The United States Federal Reserve System

The United States Federal Reserve System (the Fed) is the nation’s central bank. They govern all the other banks and use monetary policy to control the money supply and the interest rates. The Fed has four key tools to do this and they are reserve requirement, discount rate, federal funds rate, and open-market operations. In this essay I will explain how each tool works and what it accomplishes.
The reserve requirement is a certain percentage set by the Fed that banks must hold in cash either in their bank vault or as a deposit with the Fed. The main function the reserve rate accomplishes is controlling liquidity, or the availability of cash in the financial system. By decreasing the reserve requirement there is more cash to be circulated in the economy, while increasing the reserve requirement would reduce cash being circulated and slow down the economy. The second tool available to the Fed is the discount rate which is the rate at which banks can borrow from the Fed. Since there is a reserve requirement that needs to be maintained,

When a bank is short on the reserve requirement they will borrow from other banks. This rate is what banks charge for overnight loans, which leads us to open-market operations. Open-market operations is the sale or purchase of securities by the Fed from member banks. The major function of an open-market operation is to raise or lower the interest rates. If the Fed wants to raise interest rates they will sell securities to member banks. For the reason that banks have lower funds to loan the interest rates will go up, but if the Fed wants to lower interest rates they will buy securities from member banks. This will give banks funds that are more than sufficient to meet the reserve requirement thus having excess cash to lend out, lowering the interest rate. Open-market operations is another great to to combat