subject: Federal Reserve And Its Policies [print this page] Federal Reserve (Fed), the central bank of the USA, not only plays a key role in the economic development of the country but also has significant global influence. Besides influencing supply of money through its monetary policy, as the central bank, Fed's responsibilities include maintaining financial stability through its lender of last resort role, supervision of banking system and rendering payment system services to government and financial firms.
Monetary policy of the Fed has a significant influence on our day-day life as it has a direct effect on the availability of money supply in the market. Monetary policy aims at improving employment, stabilizing prices, setting moderate long term interest rates and in turn promoting sustainable economic growth.
The Fed implements its policy through three main tools.
Open Market Operations Buying and selling of government securities aimed to stabilize money supply in the economy. Securities are bought to increase money supply into the economy while securities are sold to drain off excess money.
Discount Rate It's the rate charged to banks and other institutions on the loans they avail from regional Federal Reserve Bank's lending facilities.
Reserve Requirements The amount of physical funds depository institutions must hold in reserve against deposits of its customers.
New tools viz., Term Auction Facility, under which the Fed auctions sound collateralized loans to depository institutions and Term Securities Lending Facility, under which the Fed offers Treasury General Collateral in exchange for other eligible collaterals to primary dealers are being increasing used post subprime mortgage crisis.
Policy making body of the Fed is the Federal Open Market Committee, which undertakes crucial decisions on interest rates, money supply etc. The committee meets eight times a year ensuring timely action on economic and financial developments. At the meeting, current and prospective national and international situations are evaluated, reports of account transactions are reviewed, polices depending on the economic state are framed. It consists of the president of Federal Reserve Bank of New York, seven members of the Board of Governors and four rotating members from the other eleven Reserve Banks.
