• Second Most Effective
• Most used

The most frequently used tool of the Federal Reserve for influencing the quantity of Bank Reserves, and thereby market interest rates, consists of the activities of the Federal Open Market Committee. The committee itself simply sets the policy for the traders at the Federal Reserve Bank of New York who buy and sell securities in order to increase or decrease bank reserves.

Because they have slightly different effects, I have presented on the next few pages transactions between the Fed and Banks that act as dealers and the Fed and Non-Bank Dealers.

Increasing Bank Reserves

Purchases from Banks

Purchases from Non-bank Dealer

Reducing Bank Reserves

Sale to Banks

Sale to Non-bank Dealers

 

Keep these simple formulae (from the Fed's perspective) in mind:

Purchase = Increase Reserves

When the Fed buys anything, it pays for it by adding reserves to a bank's account.

Sale = Decrease Reserves

When the Fed sells anything, it gets paid for it by subtracting reserves from a bank's account.