Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
Search the full text of this book:

by Robert Hashemian

Page 8

2. Reserve Requirement - The Fed can also adjust the reserve requirement for banks and financial institutions. Lowering the requirement increases the available unlocked cash for the banks, while increasing the reserve requirement ties up more of the cash, resulting in less outflow of money to the public in the form of loans. The Fed is usually reluctant to alter the reserve requirement but it does so on occasion.

3. Discount Rate - The Fed can increase or decrease the rate of interest that banks and financial institutions are charged when they borrow money directly from the Federal Reserve. Banks may borrow money from the Fed for short periods if they meet stringent guidelines and if they are faced with an emergency situation that has brought their reserves below required levels and which cannot be remedied through other means. Lowering the Discount Rate allows the banks to get access to more cash due to a favorable interest rate, while increasing the Discount Rate makes borrowing money from the Fed less palatable; less cash is available as banks shun higher borrowing costs. (Note: The Discount Rate is usually the lowest interest rate available to banks so there are no cheaper alternatives to the Discount Rate.) The Discount Rate is the only rate the Fed can directly modify, and it could have an effect on other interest rates. The Fed changes the Discount Rate very infrequently and usually only under special circumstances. Most banks however do not borrow money from the Fed; instead they borrow from each other. Therefore the Discount Rate is mainly regarded as an indicator for where the interest rates should be. As such the Discount Rate is mainly a symbolic rate, but it is generally kept within half a percentage point (50 basis points) of the more watched Federal Funds Rate, a.k.a. overnight bank lending rate (covered later on).

So let's consider an example of how the Fed's implementation of Monetary Policy might affect a specific bank. Bank A (a poor but proud bank) has $3 million in assets of which $1 million is earmarked as


<< Prev Page   |:::::::::::::::::::::::::|   Next Page >>
Table of Contents
Copyright and Disclaimer
  • If you have enjoyed reading this page, please consider purchasing the book or making a Bitcoin donation 1K9TzBvQ2oaEb4tX9t2vKDtZouMcpfV6QF.
  • Book Chapters
    Table of Contents Copyright and Disclaimer Foreword Money
    Bonds Futures Stocks Options
    Mutual Funds Retirement Final Words Appendix A

    Read Financial Markets  |   Home  |   Blog  |   Web Tools  |   News  |   Articles  |   FAQ  |   About  |   Privacy  |   Contact
    Donate Bitcoin: 1K9TzBvQ2oaEb4tX9t2vKDtZouMcpfV6QF
    paypal.me/rhashemian
    © 2001-2019 Robert Hashemian   Powered by Hashemian.com