The Fed can increase the amount of money in the financial system — or what’s known as the money supply — if it wants to make borrowing easier and give the economy a boost. That’s known as adopting an easy money policy. Or, if the Fed wants to slow down the economy and put a check on inflation by making it harder to borrow, it can reduce the money supply by adopting a tight money policy.
The
most powerful tool the Fed has for increasing or decreasing the
money supply, and the one it currently uses, is called open market
operations. That means the Fed buys or sells U.S. Treasury securities
on the
open
market.
When the Fed buys securities, the amount it pays
finds its way into the bank account of the seller. Once the funds
are in the bank, the bank has more funds available to lend. Those
funds are known as the bank’s reserves.
And when the Fed sells securities, the buyers
pay with funds drawn from their bank. This takes money out of
circulation and reduces bank reserves. Tighter reserves make the
banks less willing to lend at attractive rates.
Anthony Santomero,
Federal Reserve
Bank of Philadelphia
The Open Market Committee
The Fed’s Open Market Committee
(FOMC) decides, at one of its eight scheduled yearly
meetings or in special session, whether to buy or
sell
securities.
Then it instructs the Federal Reserve
Bank of New York — at the center of the country’s
largest financial community — to act on its decision.
The
most powerful tool the Fed has for increasing or decreasing the
money supply, and the one it currently uses, is called open market
operations. That means the Fed buys or sells U.S. Treasury securities
on the
Anthony Santomero, 