discretionary monetary policy

Dictionary of Banking Terms for: discretionary monetary policy
discretionary monetary policy

authority of the Federal Reserve Board to influence market interest rates, such as the federal funds(fed funds) rateor the discount rate. When the Fed decides to lower the Fed Funds target rate, it instructs the Open Market Desk at the Federal Reserve Bank of New York to buy Treasury bills, notes, and bonds in the financial markets.

This puts money in the banking system because it increases the supply of bank reserve, thereby pushing Fed Funds rates lower so commercial banks can charge each other a lower rate on overnight loans of Fed Funds. The Fed lowers the Funds Rate when it wants to stimulate the economy, usually when consumer spending is weak and factory output is declining. When the Fed wants to raise the fed Funds target rate, it sells securities to dealers, which drains reserves from the banking system.

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