Why does the fed use open-market operations as its principal tool of monetary management, rather than changes in the required reserve ratios, or changes in the discount rate?
Answers
Answer:
The Federal Reserve purchases and sells U.S. Treasury securities on the open market in order to regulate the supply of money that is on deposit in U.S. banks, and therefore available to loan out to businesses and consumers. It purchases Treasury securities to increase the supply of money and sells them to reduce the supply of money.
By using this system of open market purchasing, the Federal Reserve can produce the target federal funds rate it has set. It calls this process its open market operations.
Understanding Open Market Operations
The federal funds rate is the interest percentage that banks charge each other for overnight loans. This constant flow of vast sums of money allows banks to keep their cash reserves high enough to meet the demands of customers while putting excess cash to use.