The Market for Federal Reserve Balances

 

 

The Federal Reserve influences the economy through the market for balances that depository institutions maintain in their accounts at Federal Reserve Banks. Depository institutions make and receive payments on behalf of their customers or themselves in these accounts. The end of day balances in these accounts are used to meet reserve and other balance requirements. If a depository institution anticipates that it will end the day with a larger balance than it needs, it can reduce that balance in several ways, depending on how long it expects the surplus to persist. For example, if it expects the surplus to be temporary, the institution can lend excess balances in financing markets, such as the market for repurchase agreements or the market for federal funds.

 

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