Keywords: Monetary policy, Federal Reserve Act, discount window, open market operations
Abstract: The Federal Reserve Act authorizes the Federal Reserve to undertake various types
of discount window loans and open market operations. While the Federal Reserve
generally has not found it necessary to use all types of such authority, there could
be circumstances in which the Federal Reserve might need to consider utilizing its
statutory authority more broadly than it has in the past.
We examine the limits imposed by the Federal Reserve Act along two dimensions:
those types of counterparties and financial instruments with which the Federal Reserve
may conduct monetary policy. In doing so, we develop a theme not commonly pursued
in the literature--the ways and extent to which the Federal Reserve Act limits the
Federal Reserve from taking credit risk onto its balance sheet.
We also provide some historical perspective on how the current powers of the
Federal Reserve came to be authorized.
Full paper (221 KB PDF)
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Last update: August 9, 2004