The main monetary policy instruments of the fed are reserve requirements, open market transactions and discount rate. Using each of these tools, the fed influences the money supply in the economy. In the early years of the fed’s main tools were the discount window. In recent years, the most significant instrument of monetary policy are open market transactions.
Theoretically, the share of all funds received from the escrow Institute shall be kept at the fed or in the form of a Deposit, either in the form of cash. The percentage of funds which must remain at the fed, called the norm of obligatory reservation. This rule varies depending on the volume and type of funds, Deposit taken by the Institute.
The act of liberalization of Depository institutions and monetary control (Depository Institution Deregulation and Monetary Control Act – DIDMCA) set the same reserve requirements for all Depository institutions. In accordance with this law, Depository institutions-commercial banks, savings and loan associations, credit unions, agencies and branches of foreign banks and corporations established in accordance with the law of edge (Edge Act).
The Federal reserve Board has the right to change reserve requirements within limits set by the Act on the liberalization of Deposit institutions and monetary control. For example, the reserve ratio for a particular volume of funds on current accounts can vary from 8 to 14%. However, the fed may not impose reserve requirements on certain types of deposits. Thus, the funds placed on time deposits of natural persons are not subject to reservation, except in exceptional circumstances.
For Deposit institutions have a minimum amount of the amount of their obligations, which should be stored in the form of required reserves. However, institutions typically reserve more than the statutory minimum, in the form of excess reserves. Requirements for compulsory redundancy have to burden smaller institutions to a lesser degree.
The reserved amounts are divided into lending and Nonlending. Non-borrowed funds may be available to Depository institutions only by buying them on the open market. The borrowed funds can be borrowed at the reserve Bank via its discount window.