The Federal Reserve requires that all member banks maintain non-interest bearing reserve deposits based on a percentage of their transaction balanced at the district Federal Reserve Bank. Reserve requirements refer to the percentage of deposits that a bank or other depository institution must either hold as vault cash or on deposit at a Federal Reserve Bank. This money may not be lent or invested. The discount rate is the interest rate that Federal Reserve Banks charge for short-term loans to its members. However, changes in the discount rate act as a signal of the Federal Reserve's intention to change interest rates. The Federal Reserve is responsible for the buying and selling of government securities. The federal reserve is also the official buyer and seller of foreign currencies and holds gold deposited in the U.S. by other countries.

The Monetary Control Act (MCA) of 1980 authorized the Federal Reserve Board to impose a reserve requirement of 8 percent to 14 percent on transaction deposits and up to 9 percent on nonpersonal time deposits. 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

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 evaluated monetary policy under Federal Reserve Board chairperson Alan Greenspan as part of their consideration of authorizing Greenspan's second term. Some in the banking industry consider the Federal Reserve's ability to influence monetary policy an illusion (Ely, 1996).

Norton, R. (1997, August). Greenspan's decade: Get real. Fortune, pp. 30-32.

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.

Ely, B. (1996, February). A hard look at fed's wizard of oz. American Banker, p. 18.

The 10 years since Greenspan took over as chairperson of the Federal Reserve are the best years in the history of monetary policy according to a recent article in Fortune magazine (Norton, 1997, p. 30). Norton (1997) characterizes the Federal Reserve as an often destabilizing force in the economy before the early 1980s. Early predictions that inflation would rise have been mostly untrue under Greenspan. Price stability is the most important goal for the Federal Reserve. Greenspan led the Federal Reserve through a series of rate hikes to control inflation (Norton, 1997, p. 30).