of Governors, at the Federal Reserve Board Conference on Key Developments in Monetary Policy, Washington, DC, October 8, 2009. In such a case, the Fed serves as lender of last resort, one of the classic functions of a central bank. Treasury bonds and other government securities. Economic and Financial Developments, the labor market. As the economy recovers, the ability to pay interest on reserves gives the Fed another tool to tighten policy without having to significantly or suddenly reduce the supply of reserves in the banking system.
The interest rate paid on reserves is effectively a floor beneath the federal funds rate because banks are not willing to loan to each other at rates significantly below what they can earn by leaving their reserves on deposit with the Fed. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. The Fed sets reserve requirements for all commercial banks, savings banks, savings and loans, credit unions, and.S. Fed Chairman Game: The Fed Toolkit, Federal Reserve Bank of San Francisco. The price index for personal consumption expenditures increased.7 percent over the 12 months ending in December 2017, about the same as in 2016. By law, all depository financial institutions must set aside a percentage of their deposits as reserves to be held either as cash on hand or as account balances at a Reserve Bank. Less money in these reserve accounts means a smaller supply of money in the banking system, putting upward pressure on the federal funds rate. Real gross domestic product (GDP) is reported to have increased at an annual rate of nearly 3 percent in the second half of 2017 after rising slightly more than 2 percent in the first half.
Monetary and Federal Reserve Policy