An explanation of the basic instruments and limitations of Federal Reserve monetary policy.

1. Federal Reserve 101

3. Reserve Requirements

4. Open Market Operations

5. The Discount Window

7. The interest that the Fed charges on these loans is known as the Discount Window Rate

8. The Fed directly controls the Discount Window Rate.

10. These deposts are known as bank Reserves .

11. Banks are required by the Fed to keep a certain amount of their money in these reserves.

12. The Fed determines, and can change at any time, the specific proportion that banks must keep in reserves–the banks' Reserve Requirements .

15. In theory, it could buy anything

16. In practice, it usually buys treasury bills from banks.

17. In order to pay a bank, it need not print more money: it simply increases the recorded size of that bank's reserve.

18. The bank eventually lends the extra money out, putting it in circulation.

22. Conversely, it can only sell what assets it has.

25. The Fed sets a target for the federal funds rate and uses this as a guide to how much money it should take out of or put into the economy.

26. The Fed sets a lower target when it wants a looser monetary policy, and a higher target when it wants a tighter one.

28. When it is higher than they want it to be, they put more money into the economy.

29. When it is lower than they want it to be, they take more money out of the economy.

32. Open Market Operations , from the Federal Reserve Website

33. Monetary Policy , from the Federal Reserve website

34. Federal Reserve 101 , at my blog Sophistpundit

36. Drive Through Bank Teller from frankh's photostream

37. Dollar Bill from Wikipedia

38. Bernanke Action Figure from Commodity Bull Market blog

39. Percentage Sign from Wikipedia

40. This work is licensed under a Creative Commons Attribution 3.0 United States License Presentation Created by Adam Gurri