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Two Functions of Federal Reserve System

The Federal Reserve may impose a reserve requirement of any size on the amount depository institutions in the U.S. owe, on a net basis, to their foreign affiliates or to other foreign banks. MCA also provided that only 3 percent reserve would be required for the first $25 million of a bank's transaction accounts. The $25 million requirement would be adjusted each year by a factor equal to 80 percent of the percentage change in total transaction accounts in the U.S. This adjustment was designed to help small banks to meet the reserve requirements. The Garn-St. Germain Act of 1982 provided for a 0 percent reserve requirement for the first $2 million of a bank's deposits. With both laws, the reserve requirement increases as total deposits in the country increase. By 1995, the federal reserve minimum was $4.3 million under Garn-St. Germain and $52 million under MCA (FRB, ND, p. l).

Monetary policy is implemented primarily by changing the size of the reserves. By raising legal reserve requirements, the Federal Reserve reduces the amount of money supply generating by the banking system. Credit is tightened as a result of this action. When reserve requirements are lowered, the money supply can increase. However, Fedpoint 45 indicates that, in practice, the connection between reserve requirements and money creation is not as strong as may have been suggested (FRB, nd, p. 2).

Fedpoint 45 covers reserve requirements adequately but not in depth. While the article acknowledges that the Federal Reserve's influence on money creation and monetary policy may not be as strong as many might believe, the article fails to mention the impact of factors outside the Federal Reserve, such as commercial banking, other financial markets, and the economy, on monetary policy.

The Federal Reserve and its board chairperson have been a major topic in the financial news for several reasons. Last year, the Senate Committee on Banking evalua...

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Two Functions of Federal Reserve System. (1969, December 31). In Retrieved 18:27, July 20, 2017, from
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