The Fed's Monetary PolicyaToolboxFigure18.1The Market for Bank ReserveseReserveTarget RateSupplyReserveDemandQuantityof Reserves21-6
21-6 The Fed’s Monetary Policy Toolbox
The Fed's Monetary PolicyCToolboxFigure18.2Federal Funds Target Rate and Daily Market Rate,January1992-August2004June30,1998January2,2000September19,2001EffectiveRateFederalFunds TargetRate21-7
21-7 The Fed’s Monetary Policy Toolbox
The Fed's Monetary PolicyC8Toolbox2. Discount Lending - Lender of Last Resort(1) Types of Loans - Web Link·Primary CreditShort-term100 basis points above target FedFunds RateSecondaryCreditFor banks that qualify for primary credit150 basis points above target Fed Funds RateSeasonalCreditSmall banks withcyclical farm loans21-8
21-8 2. Discount Lending – Lender of Last Resort （1）Types of Loans – Web Link • Primary Credit • Short-term • 100 basis points above target Fed Funds Rate • Secondary Credit • For banks that qualify for primary credit • 150 basis points above target Fed Funds Rate. • Seasonal Credit • Small banks with cyclical farm loans The Fed’s Monetary Policy Toolbox
The Fed's Monetary PolicyOToolbox3.ReserveRequirementsThe Monetary Control Act changed therules slightly, so that the Fed can now setthe reserve requirement ratio between 8percent and 14 percent of so-calledtransactions deposits.21-9
21-9 3. Reserve Requirements • The Monetary Control Act changed the rules slightly, so that the Fed can now set the reserve requirement ratio between 8 percent and 14 percent of so-called transactions deposits. The Fed’s Monetary Policy Toolbox
The Fed's Monetary PolicyCCToolboxTable18.1The Tools of U.S.Monetary PolicyWhat Is It?HowIs ItControlled?WhatIs ItsImpact?Target FederalInterestrate charged onSupplyofreservesChanges interest ratesFunds Rateadjustedthroughopenovernightloansbetweenthroughouttheeconomybanks.market operations tomeet expected demandat the target rate.Discount RateInterestrate chargedbySetasapremium overProvides short-termtheFederal Reserve onthetargetfederal fundsliquiditytobanksintimesloanstocommercialrate.of crisisandaids inbanks.controlling thefederalfunds rate.ReserveFraction of depositsthatSetbytheFederalStabilizesthedemandforRequirementbanksmustkeepeitherReserveBoard within areserves.ondepositattheFederallegallyimposedrange.Reserveorascashintheir vaults.21-10
21-10 The Fed’s Monetary Policy Toolbox