The Federal Reserve of the United States of America is the regulatory entity that determines the reserve ratio, and therefore the required reserves that banks must keep on hand.

The Federal Reserve

The Federal Reserve, also known as the Federal Reserve System or The Fed, is the central bank of the United States. It was created by Congress to provide the U.S. with a safer and more stable monetary and financial system. The Federal Reserve was created in 1913 when President Woodrow Wilson signed the Federal Reserve Act.

Federal Reserve responsibilities are:

• to control the nation's monetary policy by influencing the money supply and credit conditions in the economy in an attempt to achieve full employment;

• to supervise and regulate banks and other financial institutions to ensure the stability of the U.S. banking and financial system;

• to contain the systematic risk of the economy; and

• to provide financial services to the U.S. government, U.S. financial institutions and foreign official institutions.

The Reserve Ratio

The reserve ratio is one of the three tools that the Federal Reserve uses to control the money supply to expand or contract the economy. The reserve ratio sets the amount of reserves that banks are required to hold as cash on hand in a vault or with the local Federal Reserve Bank.

If the Federal Reserve wants to increase the money supply, it lowers the reserve ratio; if it wants to lower the money supply, it increases the reserve ratio. Lowering the reserve ratio expands the economy, and increasing the reserve ratio contracts the economy.

  1. Why would the Federal Reserve change the reserve ratio?

    Understand the Federal Reserve's monetary policy and the tools it uses to change that monetary policy. Learn about the reserve ... Read Answer >>
  2. What happens if the Federal Reserve lowers the reserve ratio?

    Learn about the Federal Reserve's monetary policy and the tools it uses to control it. Understand what happens if the Federal ... Read Answer >>
  3. How are bank reserve requirements determined and how does this affect shareholders?

    Learn how bank reserve requirements are determined and how bank reserves affect shareholders through improved bank stability ... Read Answer >>
  4. Which nations' economies have reserve ratios?

    Learn more about the inconsistent imposition of depository banking reserve ratios, and why the United States stands alone ... Read Answer >>
  5. How is the Federal Reserve audited?

    Learn how the Federal Reserve gets audited. Due to gridlock, the Federal Reserve has been forced to take on the role of stimulating ... Read Answer >>
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