Power of the Federal Reserve in Monetary Policy

From the Paper:

" In order to discuss how monetary policy should be conducted in the U.S. it is first necessary to briefly summarize the unique power of the Federal Reserve and policy prescriptions suggested by alternative schools of thought. The foundation of the power of the Federal Reserve comes from its unique role in controlling the nation's supply of "base money;" the sum total of the currency in the hands of the public and the reserves that banks are legally required to hold to bank their deposits. Banks can withdraw their reserves in the form of cash, or deposit cash with the Fed to add to their reserves. But the total quantity of base money cannot be changed except by the Fed's action. (Woolley, 1984)


By injection or withdrawing base money from the system the Fed has immense influence over the economy. If the Fed puts more cash in - which it usually does by buying U.S. government debt..."

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