Page 33 - Ultimate Guide to Currency Trading

The third level of money in the markets is M3. The M3 consists of the cash products that large
banks and business have on deposit. It includes CDs and other structured time deposits in both
domestic and Eurodollars. The main purpose of the M3 calculation is the amount of money that is
used sys-tem wide as a unit of account for that currency. The last measure of money supply is L. L
refers to all of the other liquid cash-like equivalents including ultrashort-term commercial paper, T-
bills, and other structured cash equivalent letters of credit, etc.

The Role of the Federal Reserve

The central bank of the United States is the Federal Reserve, also known as the Fed. The Fed performs
many roles, but most importantly its function is that of a bank. Its main clients are not individuals or
small business, however. Its main clients are other U.S. banks. Lately, the role of the Fed has been
expanded to include the coordination of swaps and reverse repurchase agreements (repos) that
involve other central banks and some of the largest and most influential banks of other home
countries. In this fashion, the central bank of the United States can act as a "lender of last resort," a
bank that other banks can turn to in times of need. This need was most apparent during and after the
economic and banking crisis of 2008-2009.

During those years the strength of the U.S. Federal Reserve was tested to the maximum. The
Fed was called into action, and it provided liquidity to banks of all kinds by offering the exchange of
"toxic" assets in place of "good" assets. The Fed did this by taking these rapidly deteriorating assets
onto its inventory and exchanging them with the much-needed liquidity that the banks and
investment banks of the United States required at that time. There is even evidence that the central
bank of the United States offered and provided liquidity to foreign banks, including the largest Swiss
bank, UBS.

If you are interested in the role that the U.S. Federal Reserve played in the crisis of
2008-2009, then you can do a bit of research on the subject. A good place to start is the
Federal Reserve's website (www .federalreserve.gov) and the website of its biggest
player, the Federal Reserve Bank of New York (www.newyorkfed.org/index.html).

Keeping the United States on Track

In addition to acting the role of lender of last resort, the Fed sets a few key policies that can have a
heavy influence on the U.S. economy. These key policies can go a long way in keeping the United
States on track or giving it a nudge in the right direction if its economy is too slow or too strong. First,
the required reserve ratio is set by the Fed, and it refers to the minimum amount of money that retail
banks are required to hold on tap for customers' withdrawals. The reserve ratio acts as a limit on how
much a bank can lend out in relation to its deposits. The lower the required reserve ratio, the more