The Federal Reserve's income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions (the rate on which is the so-called discount rate). After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. (Fed FAQ)
The Fed.’s monetary policy actions affect prices, employment, and economic growth by influencing the availability and cost of money and credit in the economy. This in turn influences consumers' and businesses' willingness to spend money on goods and services.
The Fed uses three monetary policy tools to influence the availability and cost of money and credit: open market operations, the discount rate, and reserve requirements.
A third way in which the Fed operates monetary policy is by regulating the proportion of liquid reserves that banks must keep on hand. Obviously, the higher the reserve requirement, the less funds there are available to make new loans. The board of governors has the authority to determine reserve requirements above the legal minimum for all federally insured depository institutions. Reserve requirements may be changed by a simple majority vote of the board. In practice, however, reserve requirements are rarely changed because even small adjustments produce rather sweeping impacts on the quantity of required reserves. (Johnson)
Reserve Requirements:
By law, financial institutions, whether or not they are members of the Federal Reserve System, must set aside a percentage of their deposits as reserves to be held either as cash on hand or as reserve account balances at a Reserve Bank..............
