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The Bottom Line
The reserve ratio is a critical tool used by the Federal Reserve to regulate the U.S. money supply and ensure economic stability. It mandates the percentage of deposits banks must retain rather than loan out or invest. In times of economic growth, a lower reserve ratio facilitates increased lending, stimulating the economy by putting more money in circulation.
Conversely, during inflationary periods, a higher reserve ratio helps reduce the money supply to stabilize prices. Understanding how the reserve ratio impacts lending and economic conditions empowers both banks and individuals to anticipate shifts in financial markets.
- As of March 26, 2020, the Federal Reserve lowered reserve requirements to 0% in response to economic conditions during the pandemic.
Sooo…….. can we infer from the above that the FED does not give a rip about inflation and stable prices and that we can’t even say that we have a fractional reserve system?