<P> To smooth temporary or cyclical changes in the money supply, the desk engages in repurchase agreements (repos) with its primary dealers . Repos are essentially secured, short - term lending by the Fed . On the day of the transaction, the Fed deposits money in a primary dealer's reserve account, and receives the promised securities as collateral . When the transaction matures, the process unwinds: the Fed returns the collateral and charges the primary dealer's reserve account for the principal and accrued interest . The term of the repo (the time between settlement and maturity) can vary from 1 day (called an overnight repo) to 65 days . </P> <P> The Federal Reserve System also directly sets the "discount rate", which is the interest rate for "discount window lending", overnight loans that member banks borrow directly from the Fed . This rate is generally set at a rate close to 100 basis points above the target federal funds rate . The idea is to encourage banks to seek alternative funding before using the "discount rate" option . The equivalent operation by the European Central Bank is referred to as the "marginal lending facility". </P> <P> Both the discount rate and the federal funds rate influence the prime rate, which is usually about 3 percentage points higher than the federal funds rate . </P> <P> Another instrument of monetary policy adjustment employed by the Federal Reserve System is the fractional reserve requirement, also known as the required reserve ratio . The required reserve ratio sets the balance that the Federal Reserve System requires a depository institution to hold in the Federal Reserve Banks, which depository institutions trade in the federal funds market discussed above . The required reserve ratio is set by the Board of Governors of the Federal Reserve System . The reserve requirements have changed over time and some history of these changes is published by the Federal Reserve . </P>

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