In reality the Fed does not rely on an active use of the discount rate for

In reality the fed does not rely on an active use of

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In reality, the Fed does not rely on an active use of the discount rate for purposes of carrying out monetary policy. As mentioned previously, the Fed uses open-market operations to achieve its objective of manipulating the level of reserves in the banking system and, consequently, the federal funds rate. The latter is the Fed’s sole objective in regards to changes in monetary policy. The discount rate is essentially adjusted after a change in monetary policy has already been reflected in the Fed’s open-market operations and a new federal funds target has been established (so that the federal funds rate and the discount rate do not diverge much). The Fed vs U.S. Treasury
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2006 CFA Level 1- Study Session 4 - Macroeconomics ©ANALYSTNOTES.COM 59 The U.S. Treasury: is a budgetary agency, and is concerned with the finances of the federal government (fiscal policy), issues bonds to the general public to finance the budget deficits of the federal government, and does not determine short-term interest rates or money and bank reserve growth. The Fed is a monetary agency. It is concerned with monetary policy and has the responsibility to control inflation, does not issue bonds, and determines the level of the federal funds rate (and influences overall short-term rates and reserve/money growth) primarily through the purchase and sale of U.S. Treasury securities.
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2006 CFA Level 1- Study Session 4 - Macroeconomics ©ANALYSTNOTES.COM 60 d. Ambiguities in the meaning and measurement of the money supply. Many structural changes and financial innovations are altering the nature of money, and therefore the usefulness of money growth figures (both M1 and M2) as an indicator of monetary policy. Widespread use of the U.S. dollar outside of the United States. People in many countries, especially those with hyperinflation and/or political instability, prefer to hold the U.S. dollar in order to store the value of future purchase power. As a result, as much as two thirds of U.S. currency is held overseas. This substantially reduces the reliability of the M1 money supply. It impact much more on M1 than M2 figure because the currency component is a much smaller proportion of M2 than M1. The increasing availability of low-fee stock and bond mutual funds. Since stock and bond mutual fund investments are not counted in any of the monetary aggregates, movements of funds from various M2 components will distort M2 money supply figures. Debit card and electronic money . As debit cards and electronic money are widely used, less money will be held in the form of currency and more as bank deposits. As a result, the money supply will grow rapidly making M1 figures less reliable.
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2006 CFA Level 1- Study Session 4 - Macroeconomics ©ANALYSTNOTES.COM 61 Section D. Modern Macroeconomics: Monetary Policy a. Demand and supply of money.
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