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The Role of the American Federal Reserve System

3. Reserve requirements. Congress first gave the Fed power to determine the reserve requirements of federally-chartered banks in 1935. In 1980, the Bulletin points out that power was extended to cover all depository institutions in the United States under the Monetary Control Act (p. 1). That law authorizes the Fed's Board of Governors to impose a reserve requirement of from eight to 14 percent on transaction deposits (basically checking accounts) and up to nine percent on nonpersonal time deposits and on amounts American depository institutions owe to foreign banks. Except in emergencies, the Fed has no power over reserves behind personal savings accounts and in such circumstances can raise reserve requirements another four percent. The percentage of deposits that banks or other depository institutions must hold as reserves must be held in cash in their vaults or deposited as reserves at a Federal Reserve Bank.

The power to raise or lower reserve requirements can have a powerful multiplier effect on the money supply (Bulletin, 1997, p. 2). Becker (1996) says that "if the system was flush with reserves, banks would be more inclined to make loans on good terms and low rates, whereas if reserve conditions were tighter, banks would be less inclined to lend" (p. 427). According to Schroeder (1997), "the Board of Governor's authority to adjust reserve requirements is an important tool in carrying out monetary policy" (p. 3-29). However, the Bulletin acknowledges that "the Fed changes reserve requirements for monetary purposes only infrequently" (p. 2). Becker (1996) said that until Greenspan took over as Chairman, manipulation of reserve requirements "had long been almost an afterthought of monetary policy, something that had gathered rust at the bottom of the Fed's tool chest" (p. 209). Greenspans' Fed has lowered reserve requirements twice --in 1990 by eliminating the three percent of reserve requirements on non-personal time deposits...

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The Role of the American Federal Reserve System. (1969, December 31). In Retrieved 16:31, January 19, 2017, from
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