wants to enact a loose monetary policy to stimulate economic activity. Because price inflation has been a burden in recent years, however, the Federal Reserve Board wants to avoid any action that the public might interpret as a return to inflationary conditions. Therefore, it can use one of its three primary tools of monetary policy to accomplish the objective of easing monetary conditions without drawing unfavorable publicity to its actions that could lead to concern over inflation.

If the Fed lowers the discount rate, which is one of its tools, there is a good chance that commercial banks will lower rates in turn. The public will therefore see that the Fed initiated this move, which could undermine consumer confidence about keeping inflation in check.

However, if the Fed lowers reserve requirements, banks will have more funds to inject back into the economy. As a result, theoretically there will be more money in circulation and more money for banks to lend, which is expected to stimulate economic activity.

The Fed also could use the Federal Open Market Committee (FOMC) to inject funds into the economy. The benefits of this are that these funds are generally overnighted, so the Fed will see very quickly if its actions have had any negative impact on public consumer confidence and it will be able to halt or mitigate this loose money initiative.

For instance, the FOMC released a statement on April 29, 2020, indicating this very policy:

“To support the flow of credit to households and businesses, the Federal Reserve… Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor market conditions and is prepared to adjust its plans as appropriate.”