Supply of Reserves

V. Read the text and prepare your comments on the supply of Federal Reserves, using the given below picture.

The ultimate targets of monetary policy

are specified in law as maximum employment,

stable prices, and moderate

long-term interest rates.

Components of the Federal Reserves Market
§ Required reserves (percentage of transaction deposits; amount influenced by reserve requirements) § Vault cash (retained on bank premises) § Required reserve balances (held at Federal Reserve Bank) § Excess reserves (held at Reserve Banks to provide additional protection against deficiencies and overdrafts)	§ Borrowed reserves (provided by the Federal Reserve through discount window lending) § Non-borrowed reserves (influenced by the Federal Reserve’s purchase or sale of securities in open market operations)

The students are also asked to comment on the components of the reserve market and to compare them with the ones of the reserve market of Ukraine.

The Federal Reserve supplies reserves to the banking system in two ways:

- Lending through the Federal Reserve discount window

- Buying government securities (open market operations).

Reserves obtained through the first channel are called borrowed reserves. The Federal Reserve supplies these directly to depository institutions that are eligible to borrow through the discount win­dow. Access to such credit by banks and thrift institutions is estab­lished by rules set by the Board of Governors, and loans are made at a rate of interest—the discount rate—set by the Reserve Banks and approved by the Board. The supply of borrowed reserves de­pends on the initiative of depository institutions to borrow, though it is influenced by the level of the discount rate and by the terms and conditions for access to discount window credit.

In general, banks are expected to come to the discount window to meet liquidity needs only after drawing on all other reasonably available sources of funds, which limits considerably the use of this source of funds. Coroner, many banks fear that their use of discount window credit might become known to private market participants, even though the Federal Reserve treats the identity of such borrowers in a highly confidential manner, and that such bor­rowing might be viewed as a sign of weakness. As a consequence, the amount of reserves supplied through the discount window is generally a small portion of the total supply of reserves.

The other source of reserve supply is nonborrowed reserves. Al­though the supply of nonborrowed reserves depends on a variety of factors, many of them outside the day-to-day control of the Fed­eral Reserve, the System can exercise control over this supply through open market operations—the purchase or sale of securi­ties by the Domestic Trading Desk at the Federal Reserve Bank of New York. When the Federal Reserve buys securities in the open market, it creates reserves to pay for them, and the supply of non-borrowed reserves increases. Conversely, when it sells securities, it absorbs reserves in exchange for the securities, and the supply of nonborrowed reserves falls. In other words, the Federal Reserve adjusts the supply of nonborrowed reserves by purchasing or sell­ing securities in the open market, and the purchases are effectively paid for by additions to or subtractions from a depository institution's reserve balance at the Federal Reserve.

Дата добавления: 2014-12-29