TheFed

 

Dear F. Ederal Reserve,

Let's get you back on track to a successful interview. First, know that the reserve requirement doesn't have anything to do with lunch reservations. It is the minimum ratio of held reserves to total assets that banks must keep as mandated by the Federal Reserve. This allows the Fed to control the money supply and is one of three tools it has in its disposal to implement monetary policy. Monetary policy is the actions the Fed takes to manipulate the economy, specifically the money supply and interest rates. The goal is to achieve an interest rate that encourages investing and therefore economic growth. The other two tools are Open-Market Operations and the Discount Rate. Open-Market Operations refers to the Fed's purchase and sales of US bonds, affecting the money supply and interest rates. This is the most commonly used tool of the three, followed by setting the discount rate, which is the interest rate financial institutions pay on short-term loans from the Fed. Manipulating this allows the Fed to direct overall interest rates as the Federal Funds Rate (the interest rate between banks) tends to fall under the discount rate. At your next interview, remember that Open-Market Operations is the most effective and commonly used tool of the Fed.