Question

Why does the Fed rarely use the reserve requirement as an instrument of monetary policy?

Answer 1

Note that the reserve requireent policy of teh Fed works teh follwoing way: With teh chnage (increase/decrease) in teh reserve requirement ratio, teh amount of reserves or teh share of total deposits which banks must keep wuth themselves and not loaned out changes (increases/decreases). This cuases a chnage (decrease/increase) in teh balance with teh banks that could now be loaned out. Hence even a small change in teh reserve ratio can bring a huge chnage in teh amount of reserves banks can hold. Changing this ratio thus is only needed in cases of urgency when some powerful action is needed and it also becomes difficlt for teh institutions to adjust for this ratio. Hence it is not a frequednt or easily used monetary tool by teh Fed.