credit funds (Board of Governors, Federal Reserve System, 1996). When the Federal Reserve System sells federal debt instruments in the open market, that action restricts, or uses up, available credit funds. When the Federal Reserve System calls in federal debt instruments, that action expands, or adds to, available credit funds. Changes in the supply of funds available for credit affect interest rate levels.
2. The regulation of member bank discounting (interest rate) with Federal Reserve Banks is the second monetary tool. Through this activity, the Federal Reserve System sets the interest rate that must be charged when member banks borrow from the Federal Reserve Bank in their region. Although this activity does not establish directly the level of interest rates throughout the American economy, it is the major factor considered by financial institutions in the establishment of interest rates (Board of Governors, Federal Reserve System, 1996). The level of interest rates in the economy has an impact on the demand for credit funds.
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