Final answer:
The Federal Reserve rarely adjusts the reserve requirement ratio due to the potential disruption to banks and the risk of banks failing to meet withdrawals. Exceptions are made during financial crises, and the Fed prefers open market operations as a more effective and less disruptive tool.
Step-by-step explanation:
The Federal Reserve (the Fed) seldom uses the reserve requirement ratio as a means to influence the money supply due to several reasons. One critical reason is that making large adjustments to reserve requirements can be highly disruptive and difficult for banks to implement. Additionally, such adjustments carry the potential risk of banks failing to meet depositor withdrawal demands if reserve requirements are significantly reduced.
During periods of financial stress, such as the pandemic in March 2020, the Fed did adjust reserve requirements to bolster the economy, but this is an exception rather than a rule. The Fed has also found alternative tools, like open market operations, to be more effective. Open market operations offer a more precise method for controlling the money supply without the potential disruptive side effects of changing reserve requirements.