Question

What are selected tools that the Fed could consider keeping markets functioning smoothly and to avoid a deeper downturn in credit availability?

Answer 1

Fed could consider keeping markets functioning smoothly and to avoid a deeper downturn in credit availability through different tools -

1.Discount rates - Fed could use discount rate to keep a check over consumer demand and supply in entire economy . It can raise discount rates to curb inflation and it can cut interest rates to curb slowing demand

2.Open market operations- Open market operations are used to curb excess liquidity in the market or to infuse liquidity in the markets

3.Reserve Requirements- It can ask commercial banks to maintain certain reserve to avoid adverse economic situations. It keeps on fluctuating the overall reserve requirement of the banks as it finds fit to counter economic scenarios

4.Interest on reserves- Fed keeps on maintaining a rate on interest on reseves a bank keeps.Interest on reserve helps in curbing excess reserves when it wants to control slowing demand and rising demand.