The Objective

Date: 2015-10-07; view: 366.

Open Market Operations

Text 1

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Monitory Policy

Unit 4

Speech Practice

Points for discussion:

Ø Speak about basic types of money and their functions.

Ø Speak about basic properties of money as a credit.

ØWhat do Fed Funds and Bank Money have in common? What do they differ in?

The Fed implements monetary policy by directly influencing short term interest rates. It does this through its control of the interbank lending rate, also known as the Fed funds rate. This involves supplying just enough reserves to meet the demand at its target rate.

The Fed supplies reserves to banks through its open market operations (OMO) and its discount window lending. Discount lending now plays a minor role. The principal tool is OMO in which the Fed buys or sells government securities in the secondary market to add or drain banking system reserves.

Normally the objective of OMO is not to effect a net change in reserves; rather it is to counter variations in the total. These variations are caused mainly by changes in the Treasury's cash balances at the Fed, checking system float, foreign central bank transactions, and net cash flows in or out of banks. However as net bank lending varies, the aggregate demand for reserves will vary and require the Fed to adjust the total in order to maintain control of the Fed funds rate.