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Unformatted text preview: purchase, therefore, creates an equal dollar volume of reserves. Conversely, an open market sale reduces reserves by the amount of the sale. BORROWINGS AND THE DISCOUNT RATE
Banks and other depository institutions also can borrow on a temporary basis from Reserve Banks within guidelines set by the System. Such borrowing through the “discount window”, as it is commonly called, normally supplies only about 2% of total reserves. However, it provides an important “safety valve” for individual institutions that find themselves temporarily short of reserves because of unexpected large withdrawals and the like. Guidelines set by Reserve Banks for borrowing through the discount window are intended to prevent depository institutions from borrowing for extended periods of time except under special circumstances. Even so, changes in borrowed reserve associated with the spread between market rates of interest and the discount rate often can lead to a significant change in total reserves for periods as long as 2 to 3 months.
2-20 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 2. THE MONEY MARKET
Higher or lower discount window borrowing adds to or subtracts from the total supply of reserves and thereby affects the amount of deposits banks and other depository institutions can support with a given provision of nonborrowed reserves. At times, fluctuations in borrowed reserves may pose a potential problem for monetary control by causing total reserves and hence the money supply to diverge from the Federal Reserve's goals. To offset such changes in borrowing, the Federal Reserve may adjust the discount rate: raising the rate when borrowing is too high and lowering it when borrowing is too low. Alternatively, to a degree, the Federal Reserve could offset the effects of variations in borrowed reserves by altering the supply of non–borrowed reserves. In addition to adjusting the discount rate for changes in market rates, the Federal Reserve sometimes uses discount rate changes for the...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10