Do You Know How The Fed Pumps UP The Money Supply?

Recent news reports announce that Federal Reserve has "pumped" money into the economy, without making clear what this means. Do you know how the Federal Reserve "pumps" money into the economy?

You might be wondering how this matters to you. The fact is that the more you understand how governments control money, the better you will be able to take control of your own economic situation, especially in a global economy.

One of the primary functions of a government is to control the amount of money in the system. Every nation has a central bank. In the United States, the central bank is the Federal Reserve. The central banks pay attention to the condition of the current economic conditions, and then take actions to either heat up or cool down the economy.

The news media use colorful language to say that the Fed is "pumping money" into the economy to calm fears of an economic panic. In other situations, the media refer to actions of the Fed intended to "drain money" from the system. Even though the media report that the Fed "pumps" money or "drains" money, they don't explain clearly how the Fed does this.

How exactly does the Fed increase or decrease the amount of money? First, let's make clear that Fed does not pump more money into the system by printing more currency. Currency is not the same as money.

The Fed can control the money supply with several methods. One method involves the reserve requirements for banks. A bank must keep a portion of its deposits on reserve. In other words, the bank can only loan out a percentage of its deposits as loans. The percentage it cannot loan out is the reserve.

If you deposit $1,000 in the bank, the bank makes money by loaning out most of your $1,000 to other customers. However, the bank cannot loan the full $1,000 amount.The Federal Reserve sets the reserve requirements for banks. The banks must keep 3-10% of customer deposits on reserve. This means that the bank needs to keep on reserve only 3-10% of your $1,000. With a 10% reserve, the bank must keep $100 on reserve. That means it can loan out the remaining $900. With a 3% reserve, the bank must keep only $30 on reserve. It is allowed to loan out the remaining $970.

The Fed can use the reserve requirements to control the amount of money banks have available to loan. If the Fed wants to increase the amount of money in the economy, it reduces the reserve requirements.If it wants to decrease the amount of money, it increases reserve requirements. This is how the Fed "pumps" money into the system and "drains" money from the system.

With a lower reserve requirement, the bank has more money to loan.With a higher reserve requirement, the bank has less money to loan.This is the difference between loaning out 97% of its deposits with a 3% reserve rate and 90% of its deposits with a 10% reserve rate. The changes in reserve rates increase and decrease the money supply.

So, the reserve requirement is one way that the Fed controls the amount of money in the economic system. This is why it is not exactly accurate to claim that the Fed "pumps" more money into the system. The banks are the ones pumping more money into the system, and they do that because the Fed reduced the reserve requirement.

If you deposit $1,000 in the bank, the bank makes money by loaning out most of your $1,000 to other customers. However, the bank cannot loan the full $1,000 amount. The Federal Reserve sets the reserve requirements for banks. The banks must keep 3-10% of customer deposits on reserve.

This means that the bank needs to keep on reserve only 3-10% of your $1,000. With a 10% reserve, the bank must keep $100 on reserve. That means it can loan out the remaining $900. With a 3% reserve, the bank must keep only $30 on reserve. It is allowed to loan out the remaining $970.

The Fed can use the reserve requirements to control the amount of money banks have available to loan. If the Fed wants to increase the amount of money in the economy, it reduces the reserve requirements. If it wants to decrease the amount of money, it increases reserve requirements. This is how the Fed "pumps" money into the system and "drains" money from the system.

With a lower reserve requirement, the bank has more money to loan. With a higher reserve requirement, the bank has less money to loan. This is the difference between loaning out 97% of its deposits with a 3% reserve rate and 90% of its deposits with a 10% reserve rate.

The changes in reserve rates increase and decrease the money supply. So, the reserve requirement is one way that the Fed controls the amount of money in the economic system. This is why it is not exactly accurate to claim that the Fed "pumps" more money into the system. The banks are the ones pumping more money into the system, and they do that because the Fed reduced the reserve requirement.

Tracking the Dow Movement on Friday.

The previous overnight last minute closing with a hammer top was realized at the opening bell today.With an early low,the market set itself on a bullish trail.The last half hour trading was still bullish except for profit taking which happens within the body of the white bar.














The bullish trend is still intact.