What is 'FED Pass'

A Fed pass is an action taken by the U.S. Federal Reserve to increase the availability of credit by moving additional reserves into the banking system. The supply of loans is increased as more funds are injected into major banks, typically allowing lenders to originate more mortgages and other loans at lower interest rates. 

BREAKING DOWN 'FED Pass'

A Fed pass is a prime tool used by the Federal Reserve to influence the economy. It could be taken to combat economic difficulties, such as a credit crunch. But like all Fed actions, it has only an indirect affect on the economy. When money is tight, either because interest rates are high, banks are wary of lending, or consumers and businesses are saving instead of spending and borrowing, the Fed often intervenes to jumpstart the economy. The Fed can’t force people to buy more stuff, or even force banks to loan more money. But by injecting more cash into the banking system it hopes that banks will be encouraged to lend more, and at lower interest rates that are more appealing to consumers and businesses.

To inject more money into the banking system, the Fed buys back U.S. Treasury bonds from banks and other institutional holders. These are sometimes referred to as “open market operations” (OMO). The Fed pays for those bonds by depositing cash in the banks, which is the actual “pass.” The banks, in turn, can use that cash to generate more loans, up to the reserve requirement mandated by the Fed. If the reserve requirement is 10 percent, then the bank must hold in reserve at least $1 out of every $10 it holds, to guard against bank runs.

The Multiplier Effect of a Fed Pass

There is no guarantee that a Fed pass will stimulate lending or borrowing, which are also influenced by external economic factors and consumer sentiment. But usually a monetary expansion by the Fed results in a multiplier effect across the economy. Banks will issue more loans to businesses and consumers, who will in turn spend the money on goods and services; the seller of those goods and services will then re-deposit the money in banks, which then re-loan the money.

As the economy heats up from all this activity, eventually the Fed could become nervous about excess growth, which can lead to inflation. At that point the Fed could reverse its pass and instead begin selling bonds, which will tighten credit and hopefully slow down economic growth.

RELATED TERMS
  1. Term Fed Funds

    Term Fed funds refer to funding that a bank raises in the Fed ...
  2. Federal Funds

    Federal funds are excess reserves that commercial banks deposit ...
  3. Intermediate Targets

    Intermediate targets are set by the Federal Reserve as part of ...
  4. Federal Reserve System - FRS

    The Federal Reserve System, commonly known as the Fed, is the ...
  5. Primary Reserves

    Primary reserves are the minimum amount of cash under U.S. federal ...
  6. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository ...
Related Articles
  1. Insights

    How the Federal Reserve Manages Money Supply

    The Federal Reserve was created to help reduce the injuries inflicted during the slumps and was given some powerful tools to affect the supply of money.
  2. Insights

    7 Misconceptions About The Federal Reserve

    There are many fallacies about the Fed. The following misconceptions are among the most popular.
  3. Investing

    The Fed's Tools for Influencing the Economy

    The economy can be volatile when left to its own devices. Find out how the Fed smoothes things out.
  4. Insights

    What Does the Federal Reserve Do?

    What is the Federal Reserve System and how does it affect interest rates, inflation and the market?
  5. Insights

    The Federal Reserve System Affects You More Than You Might Think

    How does the Federal Reserve System affect ordinary citizens? In more ways than you might realize.
  6. Insights

    Understanding How the Federal Reserve Creates Money

    Read about how the Federal Reserve actually targets and creates new money in the economy, and find out why the savings and loans system magnifies this process.
  7. Personal Finance

    How the Federal Reserve Affects Your Mortgage

    The Federal Reserve can impact the cost of funds for banks and consequently for mortgage borrowers when maintaining economic stability.
  8. Investing

    Understanding The Federal Reserve Balance Sheet

    We are all connected to the Fed's balance sheet, and the currency notes that we hold are its liabilities.
  9. Trading

    Why Interest Rates Have Been Low for So Long

    Learn of several competing explanations about why the Federal Reserve has kept interest rates so low in the United States since 2008.
RELATED FAQS
  1. How do central banks impact interest rates in the economy?

    Learn how central banks such as the Federal Reserve influence monetary policy in the economy by increasing or decreasing ... Read Answer >>
  2. How does monetary policy influence inflation?

    Take a deeper look at how contemporary central banks attempt to target and control the level of inflation through monetary ... Read Answer >>
  3. What factors are the primary drivers of banks' share prices?

    Find out which factors are most important when determining the share price of banks and other lending institutions in the ... Read Answer >>
Trading Center