Monetary Policy and the Federal Reserve

by Tom Reinert, April 2015

300 words

1 page



This article is a discussion about monetary policy and the Federal Reserve in whole. Operations of the Federal Reserve and different influences on it are also going to be discussed in the article. Problems and current situation of FOMC (Federal Open Market Committee) are one of the main topics of the particular discussion. Such issues as monetary policy implementation, the Federal fund changes and current state of the US economy are going to be discussed in detail.

Keywords: the Federal Reserve, the US economy, FOMC

The Federal Reserve System is the central bank of the United States. It was created by the Congress in 1913 and since then the Federal Reserve`s responsibilities have fallen into four areas: conducting monetary policy, supervising and regulating different financial institutions, providing the stability of the financial system in general, playing a major part in overseeing the national payment system (Board of Governors of the Feseral Reserve System, 2011). There are twelve districts of Federal Reserve Banks. The closest bank to New Jersey district is Federal Reserve Bank of New York, situated on 33 Liberty Street. The current chairman of the Federal Reserve is Ben Shalom Bernanke and the president of Federal Reserve Bank of New York is William C. Dudley. As a matter of fact influence from any political figures upon finances of the state should not be admitted. Thus, it is necessary the Federal Reserve remains independent.

The Federal Open Market Committee (FOMC) was created as a tool within the Federal Reserve System that could help oversee the open market of the nation (Board of Governors of the Feseral Reserve System, 2011). The current Federal Funds rate is 0.16 (daily; as of October 10) (Federal Reserve Bank of New York, 2012). In fact, the Federal Reserve uses three types of tools. The first principal tool for implementing monetary policy is the operations that concern open market. So, purchasing and selling of U.S. Treasury are the first type of the major tool. The second important tool is the discount rate. This rate is the interest rate charged to commercial banks on loans they receive from the Federal Reserve Bank. The Fed offers three types of discount programs with its own interest rate: primary credit, secondary credit, and seasonal credit. The last monetary policy implementation tool is reserve requirements. The principle of this tool infers reserve requirement that are the amount of funds depository institutions must hold in reserve.

Recently, the Committee of FOMC (September 12-13) decided to keep the federal funds rate at 0 to ¼ percent (Board of Governors of the Feseral Reserve System, 2011). Also, it was mentioned that low levels for the federal funds rate were going to be warranted at least through 2015.

Nowadays, the U.S. government uses expansionary monetary policy. The Federal Reserve uses its tools to stimulate the economy. In fact, it lowers the Fed funds rate to increase the money supply. Thus, to stimulate demand, the Federal Reserve lowers costs by reducing bank loans rates. Such economy situation can be seen today. …

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