Functions of Central Bank

This role is achieved through the implantation of the monetary policies. According to Arnold (2008), Fed has several tools at it disposal that it uses in the monetary polices. These are; the open market operations which involve buying and selling U.S government securities in the financial markets. Further the bank is charged with the responsibility of determining the required reserve ratio. This ratio is given to the commercial banks dictating the minimum amounts that they should hold in to their accounts as deposits and for lending. Finally the Fed sets the discount rates putting in to consideration the overall market rates s well as desired effect on borrowing that the Fed seeks to achieve. In addition to these three major roles, as a bank, the Federal Reserve Bank can play the roles played by the commercial banks as the rules are not entirely prohibitive as far as this duty is concerned.

The Federal Reserve is the single entity in control of the monetary policy of the United State of America. Monetary policy is the process that the Federal Reserve takes in order to control the supply of money and to attempt the control the direction of interest rates. The reason for doing these actions is in attempt to control the country’s inflation and employment rates, which are the biggest indicators and factors of a healthy economy.

An open market operation is the purchase or sale of government securities, which are government of Canada Treasury bills and bonds, in the open market by the Bank of Canada. These transactions done by the Bank of Canada change the reserves of the banks, which have an immediately impact on the amount of overnight borrowing.

The Federal Reserve has three tools to help maintain and make changes within money supply and policies. The first tool and most popular tool is open market operations. The Reserve uses this instrument to regulate the rate of federal funds within the system, which is merely the rate in which banks borrow reserves from other banks. With this tool, they can alter the interest rates and amount of money on the open market. Therefore, the Reserve can essentially control the total money stream, whether that is expanding and contracting it.

Open-market operations can be defined as a process of buying and selling of U.S. government securities in the financial markets, which in turn has an impact on the level of reserves in the banking system. Volume and the price of credit, so-called

The CB uses open market operations to buy and sell securities as a means of implementing their monetary policies. They also used the open market operations as a way to control the liquidity of available money by influencing the short term interest and the supply of base money; therefore as a result controlling the supply of money. They also set the target rate for the feds and setting the discount rate at which for member banks to lend money to each other. The Feds also evaluate the bank mergers and also implements foreign exchange policy on behalf of US government and the

The Federal Reserve website explains the theory of monetary policy in more detail. As the website says, “the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks, and in this way, alters the federal funds rate…the rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight” (www.federalreserve.gov/monetary policy/fomc).

In order for the Federal Reserve to fulfill their goal of moderate long term interest rates, stable prices and maximum employment, they rely on developing strategic changes to the monetary policy. Through monetary policy changes, the Federal Reserve can either restrict or encourage economic growth and inflation, thereby molding the macroeconomy into a state of consistent health. Overall, there are three tools used to modify the monetary policy, they include reserve requirements, discount rates, and open market operations. In an effort to promote price stability within the economy, these tools influence monetary conditions by affecting interest rates, credit availability, money supply and security prices. While one tool is use more frequently than the others, all three are necessary in establishing stable economic conditions.

The Federal Reserve Bank, known to most as the Fed, is the central bank for the United States and has a number of tools at his disposal in an effort to help implement monetary policy in an efficient manner. Open market operations is the outlet that allows for the both the purchase and the sale of the United States securities such as treasury bills and treasury bonds. Open market operations is governed by the Federal open market Committee, (FOMC). This is the body responsible for formulating policies that look to promote economic growth, price stability, and full employment (Saunders & Cornett, 2015).

The Federal Reserve uses two other types of tools besides the open market operations (OMO), and they are the discount rates and reserve requirements. The FOMC is responsible for the OMO and the discount rate and reserve requirements are taken care by the Federal Reserve System’s Board of Governors. The three fundamental tools can influenced the demand and supply of and the balances that depository institution hold which can result in the change in federal funds rate.

Monetary policy comes for the nation’s central bank, “The Federal Reserve System (commonly called the Fed) in the United States is one of the largest such “banks” in the world. The fundamentals of its operations are useful for highlighting the various measures that can constitute monetary policy.” (britannica). The central banks use liquidity to help start growth in the economy though Monetary policy. The amount of how much is in the money supply is Liquidity, which includes money market mutual funds, credit, checks

The Fed uses three tools that help influence the Monetary Policy. Open Market Operations, Discount rate, and Reserve Requirements. The open market

"Monetary policy is a policy of influencing the economy through changes in the banking system's reserves that influence the money supply and credit availability in the economy" (Colander, 2004, p. 659). Monetary policy also refers to the actions undertaken by a central bank,

The Federal Reserve mostly uses the open market operations to conduct its monetary policy. The reason is that, prior to the 2007-2008 financial crisis, the Fed thought that the other two tools are no longer an effective tool for long-term use, because they may cause market interest rate to rise when employed, thereby dampening the customer and business spending, slowing economic activities and decreasing inflationary pressure. For example, if the Fed uses the discount rate tool, it will be difficult for them to forecast changes in bank discount window when there is a shift and it will pose an upward pressure on the federal funds rates, according to the basic principle of supply and demand. Also, the changes in the reserve requirement can back fire into an uncertainty (wondering whether the bank will convert excess reserves into new loan or what portion of the new loan will be returned to depository institution in form of transaction deposit.) In short, using the open market operations helps Federal Reserve Bank to influence the supply of bank reserves by trading government securities on open market with the purpose of adjusting the technical, interim forces from shifting the efficient federal funds rate too far from target rate, thus generating additional

      Monetary policy is under the control of the Federal Reserve System and is completely discretionary. It is the changes in interest rates and money supply to expand or contract aggregate demand. In a recession, the Fed will lower interest rates and increase the money supply. The Federal Reserve System’s control over the money supply is the key Mechanism of monetary policy. They use 3 monetary policy tools- Reserve Requirements, Discount Rates/Interest Rates, and Open Market Operations. The reserve requirement is the percentage of bank deposits a bank must hold in reserves and cannot loan out. By raising or lowering the reserve requirements, the Fed controls the amount of loanable funds. The interest rate is the amount the FED charges private banks, so they can meet the reserve requirements. The prime rate is currently set at 5%. If the Interest rate is low, the banks will borrow more money from the FED and the money supply will increase. Interest rates have been above average for the past 20 years, but are currently considered low. Open Market Operations is the most effective and most used