Federal Reserve tools and their influence on economic recession

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. 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 above what the usual short-term interest rate level. Furthermore, the discount rate for secondary credit is set above that of primary credit, and the rate for seasonal credit is calculated as an average of specifically selected market rates. All of these discount rates are established by the board of directors present within each Reserve Bank (Board of Governors of the Federal Reserve System, 2012).

The third tool available to the Federal Reserve to exercise influence over economic policy is reserve requirements. These are the total amount of funds that an institution is required to hold in reserve against particular deposit liabilities. The reserves are held in the form of vault cash or deposits. Changes in reserve requirements are dictated under the sole authority of the Board of Directors. The total amount of these required reserves are determined through the application of Federal Reserve Board Regulation ratios to the reservable liabilities of an institution. These liabilities are defined as non-personal time deposits, net transaction accounts, and liabilities in eurocurrency (Board of Governors of the Federal Reserve System, 2012).