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To: Moominoid who wrote (88723)	9/10/2007 6:02:04 PM
From: GraceZ	Read Replies (1) \| Respond to of 306849

But the Fed is in effective control of the amount of such reserves. No they aren't, they wish they were but they aren't. Banks can raise or lower (to the minimum level set by the various Central Banks) the level of reserves in the absence of any action by the Fed. Think about it a while before you dismiss this as an idea and then tell me how they can do it. Hint: time deposits (CDs, savings deposits) have no reserve requirements, checking deposits have 10% requirements in the US but checking deposits in say Switzerland have only 2.5% reserve requirements. Banks also hold government bonds they can roll over or allow to mature. When the Fed buys or sells bonds it's changing the amount of reserves in the system. When the Fed engages in temporary they are doing so only to affect the price not the amount of total reserves. My objection is to their fixing of this rate between banks because it distorts the one usable signal we have about the state of the market for money, the price. The reason temporary open market operations don't effect the total amount of money or total amount of bank reserves is because no one uses FF to increase their reserve base from which they make loans, they use them to resolve short term fluctuations in their reserves. To earn a little interest on their excess reserves or to resolve temporary changes in their reserves where they drop below the minimum required for the transactional balances they have on their books. Since transactional balances (checking accounts) are available "on demand" banks don't always correctly predict how much demand there will be for that cash. When The Fed does permanent open market operations they effect the total amount of reserves. This doesn't affect the price of money, but the amount. It is important to get these two different open market operations straight, they have two completely different objectives.