Managing Cash Flow

History, the Fed, and Float 23
• Setting the discount rate. The loan discount rate is the interest rate charged
to banks for borrowing from the Fed. The higher the rate, the more expensive
it is to borrow and the higher will be the interest rates charged by
banks to their customers. This will, of course, reduce the total amount of
borrowing and will act as a damper on business activity. The reverse is
true if the discount rate is lowered—lower bank interest rates, increased
borrowing, and business stimulation.
• Handling government securities transactions. Buying or selling U.S. government
securities enables the Fed to add to or reduce the amount of overall
money in the economy. A reduced amount of money slows economic
activity while an increase in money supply increases activity.
In addition to supplying the requisite currency and coin to the economic system
consistent with monetary policy guidelines established, the Fed also provides
the principal mechanism for processing and clearing checks through the nationwide
banking system. While some financial institutions clear checks directly, most
banks use the Fed to deposit their out-of-town checks and pay out against their
own bank’s checks that have been deposited at out-of-town banks. This checkclearing
service provides a timely and accurate mechanism for getting checks
charged against proper accounts regardless of where they were deposited (at least
within the United States). The check-clearing process is depicted in Exhibit 1.3.
As a natural adjunct to the check-clearing system, the electronic transfer of
funds within the banking system is another activity the Fed handles through two
types of services:
1. Transfers by wire between the Fed offices, depository institutions, the
Treasury, and various government agencies
2. Automated clearinghouses (ACHs), which significantly speed the clearing
and settlement of electronically originated transactions. This concept is a
precursor of the so-called checkless society, which continues to evolve.
Concept of Float
FLOAT IS THE STATUS OF FUNDS IN TRANSIT.
The existence of a clearing process as handled by the Federal Reserve System contributes
to what is called “float.” Float can be simply defined as the “status of
funds in transit.” There are basically two kinds of float:
1. Disbursements float. This is represented by the dollar amount of checks
issued by a company that have not been processed by the banking system
and cleared through its disbursements account. Essentially, this money is