arly 1990s, reserve requirements have been applied only to transaction deposits, which include demand deposits and interest-bearing accounts that offer unlimited checking privileges. An institution s reserve requirement is a fraction of such deposits; the fraction-the required reserve ratio-is set by the Board of Governors within limits prescribed in the Federal Reserve Act. A depository institution s reserve requirement expands or contracts with the level of its transaction deposits and with the required reserve ratio set by the Board. In practice, the changes in required reserves reflect movements in transaction deposits because the Federal Reserve adjusts the required reserve ratio only infrequently. depository institution satisfies its reserve requirement by its holdings of vault cash (currency in its vault) and, if vault cash is insufficient to meet the requirement, by the balance maintained directly with a Federal Reserve Bank or indirectly with a pass-through correspondent bank ( which in turn holds the balances in its account at the Federal Reserve). The difference between an institution s reserve requirement and the vault cash used to meet that requirement is called the required reserve balance. If the balance maintained by the depository institution does not satisfy its reserve balance requirement, the deficiency may be subject to a charge. supply of Federal Reserve balances to depository institutions comes from three sources: the Federal Reserve s portfolio of securities and repurchase agreements; loans from the Federal Reserve through its discount window facility; and certain other items on the Federal Reserve s balance sheet known as autonomous factors. theory, the Federal Reserve could conduct open market operations by purchasing or selling any type of asset. In practice, however, most assets cannot be traded readily enough to accommodate open market operations. For open market operations to work effectively, the Federal Reserve must be able to buy and sell quickly, at its own convenience, in whatever volume may be needed to keep the federal funds rate at the target level. These conditions require that the instrument it buys or sells be traded in a broad, highly active market that can accommodate the transactions without distortions or disruptions to the market itself. market for US Treasury securities satisfies these conditions. The. S. Treasury securities market is the broadest and most active of US financial markets. Transactions are handled over the counter, not on an organized exchange. Although most of the trading occurs in New York City, telephone and computer connections link dealers, brokers, and customers-regardless of their location-to form a global market. Market Operations Federal Reserve Bank of New York conducts open market operations for the Fede...
