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Federal Reserve and Monetary Policy Part 9 of 13

The Discount Rate. The discount rate (officially the primary credit rate) is the interest rate the Federal Reserve Banks charge financial institutions for short-term loans of reserves. The volume of reserve balances supplied is usually only a small portion of the total supply of Ten Pips a Day Federal Reserve balances. However, at times of market disruption, such as the September 11, 2001, terrorist attacks, loans extended through the discount window can supply a considerable volume of Federal Reserve balances.

The Reserve Requirement. The reserve requirement is the percentage of deposits in demand deposit accounts that financial institutions must set aside and hold in reserve. If the Fed raises the reserve requirement, banks have less money to lend, which restrains the growth of the money supply. On the other hand, if the Fed lowers the reserve requirement, banks have more money to lend and the money supply increases. The Fed rarely changes Swing Trading; A Scientific Approach the reserve requirement. In fact, it is the least-used monetary policy tool because changes in the reserve requirement significantly affect financial institution operations. Reserve requirement changes are seen as a sign that monetary policy has swung strongly in a new direction.

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