What is the fed pass’
Fed a pass action, the U.S. Federal reserve to increase the availability of credit by moving additional reserves into the banking system. The supply of credit increases, as more funds are injected into major banks, typically allows the lender to take more mortgages and other loans at lower interest rates.
Breaking down the ‘fed pass’
The fed pass is the main tool used by the fed to influence the economy. It can be used to fight against economic difficulties, such as the credit crisis. But like all the actions of the fed, it has only an indirect impact on the economy. When there is not enough money, or because interest rates are high, banks are wary of lending, or consumers and businesses are saving instead of spending and borrowing, the fed intervenes frequently in order to give impetus to the economy. The fed can’t force people to buy more things, or even to force the banks to loan more money. But the infusion of money into the banking system, he hopes that banks will be encouraged to lend more and at lower interest rates, which are more attractive to consumers and businesses.
To invest additional funds in the banking system, the fed buys US Treasury bonds from banks and other institutional holders. This is sometimes called “operation open market” (OMO). The fed pays for these bonds by making cash deposits in banks, which is the actual “pass.” Banks in turn can use that money to generate more loans, up to of reserve requirements approved by the fed. If the reserve requirement is 10%, then the Bank must keep in reserve at least $1 of every $10, he keeps to protect themselves from banks.
The multiplier effect of Federal pass
There is no guarantee that the fed passage will stimulate lending and borrowing, which are also dependent on external economic factors and consumer sentiment. But usually increase the money supply by the fed results in a multiplier effect in the economy. Banks will issue more loans to businesses and consumers who in turn spend money on goods and services; the seller of these goods and services will re-Deposit the money in banks, which then re-loan the money.
As the economy heats up from all this activity, ultimately, the fed may become nervous about excessive growth, which can lead to inflation. At this point, the fed can change their pass and instead start selling the bonds that will tighten credit and, hopefully, will slow down economic growth.