Means of Issue
The monetary base consists of coins and Federal Reserve Notes in circulation outside the Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks. The adjusted monetary base has increased from approximately 400 billion dollars in 1994, to 800 billion in 2005, and over 3000 billion in 2013. The amount of cash in circulation is increased (or decreased) by the actions of the Federal Reserve System. Eight times a year, the 12-person Federal Open Market Committee meet to determine US monetary policy. Every business day, the Federal Reserve System engages in Open market operations to carry out that monetary policy. If the Federal Reserve desires to increase the money supply, it will buy securities (such as US Treasury Bonds) anonymously from banks in exchange for dollars. Conversely, it will sell securities to the banks in exchange for dollars, to take dollars out of circulation.
When the Federal Reserve makes a purchase, it credits the seller's reserve account (with the Federal Reserve). This money is not transferred from any existing funds—it is at this point that the Federal Reserve has created new high-powered money. Commercial banks can freely withdraw in cash any excess reserves from their reserve account at the Federal Reserve. To fulfill those requests, the Federal Reserve places an order for printed money from the US Treasury Department. The Treasury Department in turn sends these requests to the Bureau of Engraving and Printing (to print new dollar bills) and the Bureau of the Mint (to stamp the coins).
Usually, the short term goal of open market operations is to achieve a specific short term interest rate target. In other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold. For example, in the case of the USA the Federal Reserve targets the federal funds rate, the rate at which member banks lend to one another overnight. The other primary means of conducting monetary policy include: (i) Discount window lending (as lender of last resort); (ii) Fractional deposit lending (changes in the reserve requirement); (iii) Moral suasion (cajoling certain market players to achieve specified outcomes); (iv) "Open mouth operations" (talking monetary policy with the market).
Read more about this topic: United States Dollar
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