The Fed has other tools that it can use to
alter the money supply and affect activity in the capital markets.
Since the Fed sets the
reserve
requirement
— the percentage of a bank’s checking
deposits that it must keep on hand — and the
margin
requirement
— the percentage that stock buyers must
put down in a brokerage account to buy stocks on margin —
it can raise or lower them, too.
In theory, raising the reserve requirement
and insisting that banks keep more of their assets liquid would
reduce the money they have available to lend. But the Fed hasn’t
taken this action in recent years.
Similarly, raising the margin requirement
for investors from the current 50% would limit the amount brokerage
firms have to borrow from banks to cover their share of each margin
purchase. But the margin requirement hasn’t been changed
since 1974 and doesn’t seem likely to be changed in the foreseeable
future.
The Fed can also instruct banks to limit
their lending, called a credit market directive. The Fed did this
most recently, and with very limited success, in 1980 to rein
in credit card spending.
Anthony Santomero,
Federal Reserve
Bank of Philadelphia
Anthony Santomero of the Federal Reserve Bank of Philadelphia explains how the Fed keeps track of the economy.
To make good decisions, the Fed needs timely and reliable information about the economy — how it is doing and where it seems to be going. So the Fed pays close attention to incoming statistics and maintains a constant dialogue with business people across the country.
Since the Fed sets the
Anthony Santomero, 