Most corporations and government agencies that borrow money in the bond market are able to repay their debts and their bonds are actively traded.
I don't have to wait 10 years to get my money back if I lend $1,000 to General GM on a 10-year bond; I can resell the bond to someone else at any time.
A person will collect the face value of the bond when it's due if I do.
The bond market is where the purchase and sale of bonds take place.
The bond market doesn't have a unique location because of the amount of action on Wall Street.
The bond market exists whenever and however bond buyers and sellers get together.
People buy bonds because they pay interest.
GM is obliged to pay you interest on your loan if you buy a bond from them.
For example, an 8 percent GM bond in the amount of $1,000 states that GM will pay the bondholder $80 interest annually until the bond is paid off in 25 years.
The initial $1,000 loan will be repaid by GM.
The bond's payment is divided by the bond's price.
The yield is the same as the interest rate printed on the bond.
It might seem too good a deal to be true.
Bonds are often bought and sold at different prices than their face value.
Market Operations bonds are more attractive than holding money because of this.
The premise of open market activity is that participants in the bond market will respond to changes in bond prices and yields.
The Fed wants to move reserves into or out of the banking system.
The difference between the purchase price and the interest payment is what bonds are implied by.
Some bonds pay no interest at all.
Zero-coupon bonds make no interest pay, so they might cost $400 today.
You can get back $1,000 in 10 years.
The yield to maturity pon bond accumulates interest payments and pays them all at 9 percent.
The yield on a bond depends on a number of factors, including annual interest payments and the difference between the price paid for the bond and its face value.
The Fed wants to increase money supply.
The banking system needs more reserves.
It needs to convince people to deposit more of their financial assets in banks and less in government bonds.
Bond prices can be used to do this.
If the Fed offers to pay a higher price for bonds, it will lower bond yields and market interest rates.
The attractiveness of holding bonds will be affected by the higher prices and lower yields.
If the price offered by the Fed is high enough, people will sell some of their bonds to the Fed and deposit the proceeds of the sale in their bank accounts.
Bank reserves will be increased by the influx of money into bank accounts.
The goal was achieved.
Figure 14 shows the dynamics of open market operations.
When the Fed buys a bond from the public, it pays with a check written on itself.
There aren't any options.
If the seller wants to use the proceeds of the bond sale, he or she will have to deposit the Fed check at a bank.
In exchange for a reserve credit, the bank deposits the check at a regional Federal Reserve bank.
The amount of the check increases the bank's reserves.
As banks put their newly acquired reserves to work making loans, these reserves can be used to expand the money supply.
Government bonds are paid for by buying bonds from the public.
Reserve check is deposited in a private bank.
Bond seller getting more reserves.
It can reverse the whole process if the Fed wants to slow the money supply.
Bond yields will rise if the Fed offers to sell bonds at low prices.
Corporations, individuals, and government agencies will convert some of their deposits into bonds.
They pay the Fed for the bonds by writing a check.
The Fed takes payment through a reduction in the bank's reserve account after returning the check.
The capacity to make loans and the reserves of the banking system are diminished.
A market signal of changing reserve flows is provided by the federal funds rate.
Excess reserves are traded among banks.
The federal funds rate will increase if the Fed reduces bank reserves.
The signal of the Federal Reserve open market operations.
The recession and the effects of the September 11 terrorist attacks are combated by the fed funds.
The "target" rate is what the Fed refers to when it announces a change in the federal funds rate.
The target rate is established by it.
The Fed wants to hit the target rate by selling more bonds.
You need a sense of the magnitudes involved to appreciate open market operations.
At the beginning of 2007, the Fed owned over $600 billion in government securities.
Enormous amounts of money and potential bank reserves are involved in open market operations.
$10 of potential lending capacity is represented by $1 of reserves.
The money supply can be impacted by open market operations.
Reserve requirements, discount rates, and open market operations are the three major monetary policy tools.
The Fed can change the money supply with these tools.
The section shows how each tool can be used to reach a policy goal.
The policy goal is to increase the money supply from an assumed level of $340 billion to $400 billion.
The facts shown in Table 14.2 were discovered by the Fed in surveying the nation's banks.
There is no additional lending capacity because excess reserves are zero.
The current ratio of required reserves to total deposits is equal to 25 percent.
If the Fed wants to increase the money supply, it will have to pump more reserves into the banking system or lower the reserve requirement.
The discount rate should be reduced.
"Secondary" dealers, fi nancial institutions, and individuals trade with each other.
The funds depicted here can not be altered by these additional steps.
Paper checks don't change the funds either.
The data depicts a 2.
The banking system has $340 billion in transactions.
To increase M1 to $400 bil 6.
The U.S. bonds have a reserve ratio of $460 billion.
The discount rate can be used to buy bonds held by the public.
The Fed wants to increase the money supply from $340 billion to $400 billion.
Adding transactions deposits will be used to increase money supply if the public doesn't hold any more cash.
The total deposits need to increase from $240 billion to $300 billion.
The bank's lending power will change.
Excess reserves will jump from zero to $12 billion, and required reserves will drop to $48 billion.
The Fed's objective of increasing the money supply will be attained if the banks make $60 billion in new loans.
The discount rate is the second monetary tool the Fed has.
If the banks can make additional loans to their own customers at higher interest rates, they will be more willing to borrow cheaper reserves.
The discount rate is lowered by the Fed.
There is no way to calculate the appropriate discount rate without knowing the willingness of the banking system to borrow reserves from the Fed.
The Fed wants to increase transactions deposits by $60 billion.
The banks will have to borrow an additional $60 billion of reserves if these deposits are to be created.
The public holds $460 billion in the US.
Bank reserves will rise if the Fed can convince people to sell bonds.
The Fed will buy 15 billion U.S. bonds to meet its money supply target.
The people who sold the bonds will deposit the checks into their accounts.
The Fed will increase bank deposits and reserves by 15 billion dollars.
The additional deposits bring in only a small amount of reserves.
The $60 billion increase in M1 will be a result of both direct deposits and subsequent loan activity, as a result of the fifteen billion of open market purchases.
Market interest rates will fall when the Fed starts bidding up bonds.
The incentive to borrow excess reserves will be given by this.
The tools used to increase the money supply can also be used to decrease it.
The discount rate should be increased.
The Fed sometimes tries to reduce the total amount of cash and transactions deposits held by the public.
Minor adjustments to broader policies are what these are.
Money is needed to finance market exchanges.
The Fed rarely seeks a reduction in the money supply.
Many people talk about reducing the money supply, but they're really talking about slowing the rate of growth.
China pursued monetary restraint in order to slow economic growth.
The latest percentage associated with the economy will put the ratio at 9.5%.
In less than a year, a technical move meant to soak up money in Inc. was copyrighted by DOW JONES & COMPANY, Inc.
Money-supply growth is slow when central banks sense pressures.
By altering reserve requirements, discount rates, or open market purchases, the Fed can increase or decrease the money supply at will.
The Fed's control is not complete.
Our idea of what a "bank" is, as well as the nature of money, keeps changing.
The Fed has to run fast to stay in place.
The Fed's control of the money supply was incomplete before 1980.
The Fed did not have authority over all banks.
Only a third of the banks were subject to the Federal Reserve System's regulations.
The Federal Reserve System did not include savings and loan associations.
The banks were not subject to the Federal Reserve's requirements.
The Depository Institutions Deregulation and Monetary Control Act of 1980 was passed to increase the Fed's control of the money supply.
Fed reserve requirements now apply to depository institutions.
All depository institutions have access to the Fed's discount window.
The Fed's control of the banking system was greatly strengthened after these reforms were phased in over a period of 7 years.
Banks are part of a larger financial services industry.
Financial institutions provide many of these services.
Traditional banks have declined in number and importance, while nonbank financial institutions have grown in importance.
A core bank function is accepting and holding deposits.
Improper funds can be placed in money market mutual funds.
MMMFs pay higher interest rates than traditional bank accounts and have limited check writing privileges.
They are a potential substitute for traditional banks.
Many houses hold cash in interest-earning accounts for their stock and bond customers.
30 percent of consumer loans are now made through credit cards, as nonbanks are competing against banks for loan business.
Banks used to be the primary source of credit cards.
Large corporations offer loans to consumers who want to buy their products.
Pension funds and insurance companies use their resources to make loans.
The pension fund for college professors has lent over $10 billion to corporations.
Long-term loans are provided by many insurance companies.
Credit may be extended to American businesses by foreign banks, corporations, and pension funds.
They may hold U.S. dollars in foreign banks.
Money travels easily across national borders as shown in the World View.
Nonbank institutions compete with traditional banks for credit and deposit activity.
The nonbanks are winning.
In the past 20 years, the share of financial institution assets held by banks has fallen from 37 percent to 27 percent, which means that banks are less important than they used to be.
Control of the money supply has become more difficult because of this.
Congress is expected to approve legislation as early as today that will allow the Enforcement Network to wire funds into accounts in the United States to cripple the ability of terrorists to send money around the world.
Last year, federal prosecutors revealed that a husband and his wife had little more than a laptop computer and a shell bank in Russia, and the question is whether Congress can stop the license for what turned out to be a shell bank.
Between 1996 and 1998 the technol dered more than $7 billion.
William Schroeder said that using ogy makes it easier to transfer wire transfer software from the Bank of New York and to send money through fi ve or six allegedly worked with the Russian mafi a to send money from countries in one day.
That makes it ping off regulators.
The Treasury Department's Financial Crimes paper Co. (MA) is owned by Globe News.
Permission was granted for this article to be reproduced.
Almost two-thirds of the U.S. currency circulates outside the United States, and over a trillion dollars is transmitted by bank wire every day.
It is hard to control the domestic money supply because of the globalization of money.
The Fed has shifted away from money-supply targets to interest rate targets because of the difficulties in managing an increasingly globalized and electronic flow of funds.
Interest rates are easier and faster to track than changes in the money supply.
The Fed can change short-term interest rates through its open market operations.
Changes in the flow of funds across national borders can be offset by the Fed.
Interest rates, not more obscure data on the money-supply or bank reserves, are the immediate concern in investment and big-ticket consumption decisions according to the Fed.
The Fed will continue to use the federal funds rate as its primary indicator of monetary policy in the economy tomorrow.
The general policies of the Fed are set by the Board of supply.
The chair of the Board is chosen by the U.S. pres private banks.
LO2 wasident and confi rmed by the Senate.
The Federal Reserve System is made up of 12 regional chiefs of monetary policy.
The Fed's policy Federal Reserve banks, which provide check-clearance, strategy is implemented by the Federal Open Market reserve deposit, and loan "discounting" services to indi Committee, which directs open market sales and vidual banks.
Private banks are required to purchase bonds.
There are three basic tools the Fed can use to change money banks.
When the Fed buys bonds, it causes an increase in bank reserves in the banking system.
The selling of plier limits banks' lending capacity.
Changing bonds causes a reduction in reserves and lending discount rates.
The market signals the Fed amount of reserves maintained by banks with the federal funds (interest) rate.
The Fed gained control of the bank reserves in the 1980s by buying or selling systems.
Global and nonbank institutions engage in open market sion funds, insurance companies, and nonbank credit ser operations.
Control of the money supply has become more diffi cult due to LO2 vices.
Banks want to keep as little excess reserves as possible.