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The federal reserve system the federal reserve system

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The Federal Reserve SystemThe Federal Reserve System (the Fed) was created in 1913. Each of the 12Federal Reserve District Banks supervise all nationally-chartered and somestate-chartered banks within their district. The stated purpose of the FederalReserve isto maintain a sound banking system and a strong economyfor the nation.The Fed is responsible for controlling the flow of money intoand out of the economy. There are three primary ways this is accomplished:Manipulating interest rates.Changing reserve requirements.Selling securities.
Let's take a look at each of these.Manipulating Interest RatesThe most visible way the Fed influences real estate finance isthroughmanipulating interest rates. When the Fed meets on every thirdTuesday, the big question is always, "Will the Fed raise or lower thediscount rate?"If it appears that the economy is moving along too rapidly, which might leadto inflation, the Fed can raise the discount rate.The discount rate is theinterest rate charged by the Fed to its member banks.If the banks arerequired to pay a higher rate of interest for money borrowed from the districtbank, they will pass that increase along to the public in the form ofincreased interest rates.If the economy seems to be slowing down, possibly heading into arecession, the Fed can lower the discount rate. If the banks are able toborrow money for a lower rate of interest, they will have more fundsavailable for mortgage lending and will offer those funds at a lower rate.The Federal Funds rate is the rate member banks charge when borrowingfrom each other. The Fed recommendation to either raise or lower this rateachieves the same effect on maintaining stability in the economy.Changing Reserve RequirementsEach bank must retain a certain percentage of its assets in reserve. Thesereserves must be kept at the regional Federal Reserve Bank. The Fed sets thereserve requirements and can control the amount of money in circulation byadjusting the reserve rate up or down.For example, if the Fed believes that money and credit are too easy to get andare causing inflation, it can raise the reserve requirements. By raising thepercentage of assets that must be held in reserve, less money will be available forlending, interest rates will go up and the economy will slow down.On the other hand, lowering the reserve requirement would make more moneyavailable for lending. This can result in the lowering of interest rates which couldprovide a needed boost to the economy.Selling SecuritiesThe Fed is also allowed to buy and sell securities on the open market. When theFed buys securities, the seller receives a check from the Fed. Usually that sellerdeposits the check in his or her local bank, which sends the check to the Fed forpayment. When the Fed receives its own check, it increases the reserves of thatbank by the amount of that check. Now the bank has exceeded its reserve
requirement and can make more loans. Therefore,if the Fed is buying

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Term
Summer
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Tags
Monetary Policy, Federal Reserve System

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