Federal Reserve Bank actions to influence the availability and cost of money and credit as a means of helping to promote high employment, economic growth, price stability, and a sustainable pattern of international transactions.
In the United States, monetary policy is made by the Federal Reserve Bank and operates using three main tools:
- The reserve ratio
- The discount rate
- Open-market operations
The Reserve Ratio
The reserve ratio is the ratio of money deposited in a bank that the bank is required to keep on hand. This amount of reserves is to ensure that banks can meet withdrawal demand and also prevents banks from becoming too leveraged.
The Discount Rate
The discount rate is the rate at which the Federal Reserve Bank will lend money to individual banks. The Fed is a lender of last resort and banks generally meet reserve shortfalls by borrowing from other banks; borrowing from the Fed can be seen as a bellwether of insolvency.