Moreover, central banks are required to strengthen their balance sheets in order to manage the shocks impacting on the economy. A central bank’s capital and reserves have to be strong enough to be able to sustain repeated intervention in the money market.
3 The Fed can change the total amount of reserves available to the banking system through open market operations or its lending programs. Since the Fed controls the supply of reserves and the amount that it supplies is independent of the interest rate, the supply of reserves is illustrated as a vertical line in the stylized supply and demand curves shown in figure 2.