1. Good afternoon, ladies and gentlemen. Thank you all for coming. For those of you who do not already
know me, my name is Dvoretskih Anastasia. And today I plan to give you a short talk about the Monetary
Policy Tools using as an example Federal Reserve Bank of New York. I’m sure this will be of great interest to
everyone here. I've divided my presentation into three main sections. Firstly I’ll talk about open market
operations and its impact on the whole economy. Then, I’m going to make an overview of what reserve
requirements and discount window lending are.
I shall only take about 5 minutes of your time. If you don’t mind I’ll deal with questions at the end of
my talk.
Now, let’s start.
Central bank can use three policy tools to influence money supply and interest rates.
They are:
• Open market operations,
which are directed at changing interest rate and monetary base
• changes in reserve requirements.
• Discount window lending
Now let’s move on to the first part of my presentation, which is about Open market operations
The most direct and frequently used way of changing the money supply is by raising or lowering the
monetary base through open-market operations
Open market operations are the most important and active tool of monetary policy that the Federal Reserve
uses. These operations consist of the Federal Reserve buying and selling previously issued U.S. government
securities, or debt warrants (also called “I owe you” = IOU) of the federal government.
Open market operations influence on interest rate and monetary base in 2 ways.
1. When the Federal reserve wants to decrease
monetary base
Fed sells government securities on open market.
It pays by debiting the accounts of commercial
banks.
The banks in turn debit its clients’ accounts.
The banking system has fewer funds to lend.
it put Upward pressure on the federal funds rate—
the interest rate banks charge each other for
overnight loans (loan for very short term, for
example 1 day).
Other interest rates in the economy also rise as a
result.
Slows the economy and curbs inflation.
2. When the Federal Reserve wants to increase
monetary base
Fed buys government securities from a firms that
deals in them.
It pays by crediting the account that the dealer’s bank
has at the Fed.
The bank in turn credits the dealer’s account.
The banking system has more funds to lend.
it causes Downward pressure on the federal funds
rate.
Influences other interest rates in the economy—
which also go down.
Gives the economy a boost.
That’s all I have to say about open market operations and its impact on the economy.
The next point I’d like to make is about Reserve requirements
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2. Reserve requirements are the percentages of certain types of deposits that banks must keep on hand in their
own vaults (хранилище) or on deposit at a Federal Reserve Bank. The Fed has the authority to set reserve
requirements on checking accounts (текущие счета) and certain types of savings accounts.
Reserve requirement Impact on bank lending
Raised Reduce lending
Lowered Increase lending
The Fed rarely changes the reserve requirements.
The last change made to the reserve requirement was in April 1992, when they lowered the rate from 12% to
10% of transaction deposits (такие депозиты (или вклады), средства с которых могут быть переведены другим лицам
в виде платежей по сделкам, осуществляемым с помощью чеков или электронных денежных переводов).
The Federal Reserve generally does not change the reserve requirement when there is an alternative way of
achieving the same policy result.
Those are the main points on reserve requirements.
Now, let’s move on to discussing Discount window lending
Discount window lending is lending reserves to banks so they can meet depositors’ demands or reserve
requirements
• The interest rate on such borrowing is called the discount rate
• The Fed was set up to halt financial panics by acting as a lender of last resort through the discount window
2 types of monetary policy:
1. The aim - to check inflation.
The FED raises discount rate - Economic activity slowed
Increases in the discount rate generally reflect the Federal Reserve's concern over inflationary pressures
2. FED wants to pep economic growth
Discount rate lowers - Economic activity stimulated
decreases often reflect a concern over economic weakness.
That completes my overview of monetary policy tools.
And in conclusion I’d like to say that monetary policy aims to ensure price stability that may help long-term
sustainable growth, low unemployment levels and equitable income distribution.
Open market operations are the most important monetary policy instrument of all central banks. It is flexible
in terms of timing and transaction volume when compared to alternative monetary policy instruments.
Open market operations also may be used to implement inflation targeting monetary policy.
And that’s why OMO are preferred by Central banks in all around the world rather than discount window
lending and reserve requirements.
Sources:
1. article OPEN MARKET OPERATIONS IN TURKEY
GÖKHAN YILMAZ
Research Department of The Central Bank of the Republic of Turkey
2. Federal Reserve Bank of NY web-site
section “Financial Education”
3. Macroeconimics
Andrew B. Abel, Ben S. Bernanke, Dean Croushore
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