Open Market Operations: The Federal Reserve

Federal Reserve System, commonly referred to as Fed, was established in 1913. This was after American congress passed the Federal Reserve Act in December the same year, establishing a new set of institutions which were meant to govern the relationship between banks, the government, and the production of money (Broz 1997 p. 1). The Federal Reserve System divides the nation in 12 districts, each with its own federal reserve bank (Boyes & Melvin, 2006). Overall administrative structure of the system consists of: Board of Governors. The board is headed by a chairman who is appointed by the president to a four year term (Boyes & Melvin, 2006). The chairman serves as a leader and also as a spokesperson for

The FOMC, Federal Open Market Committee, is a group made up of the 7 Board of Governors, the President of the New York Reserve Bank, and 4 other Reserve bank presidents who switch with other Reserve Bank’s on one year terms. Together these members meet and vote on the policies in which they believe they should enact given the current and predicted future state of the economy.

In order to properly explain the expansionary economic policies that the federal government engages in, it is important to understand the vocabulary being used. The Federal Reserve Bank, commonly referred to as the Fed, “is the central bank of the United States” (Arnold, 2014). According to Steven Pressman (2013), “the Federal Reserve is the institution in which the federal government and private banks do their banking. The central Federal Reserve banks are responsible for monitoring banks and ensuring they remain solvent. They also control interest rates and thus borrowing costs for consumers and business firms. This, in turn, affects unemployment and inflation, giving the Federal Reserve substantial control over the U.S. economy.” Expansionary fiscal policy

The Federal Reserve System was signed by President Woodrow Wilson in 1913 and began operating in 1914; to this day it is still the central banking system for the United States. The responsibilities of The Federal Reserve are un-ending and complex. Due to the frequent re- occurring financial issues occurring between the years 1906-1907, like many things The Fed has had to change in numerous ways to adjust to the growing need of our expanding and evolving economy. The income for The Federal Reserve comes from interest on the U.S government securities that are acquired through open market operations (Federal Reserve education). Three major responsibilities of The Federal Reserve are stabilizing prices, interest rate adjustments, conducting investigations

To be more precise in the way the monetary policy works, it is under three implements that define its functions: open market operations, changes in the discount rate, and changes in the required reserve ratio. These are the functions that provide the Federal Reserves (the Fed) the ability to change the money supply in our economy. It is a matter of actions taken to maintain our country in the best way possible and, of course, stability comes with a price. With things like supporting our troops in other countries, like Iraq and Afghanistan, a cut in tax rates, and increases in overall spending, it adds up to where we have spent more than we have collected in revenue (Fix the

The Federal Reserve System has three branches: the Board of Governors, The Federal Open Market Committee, and Reserve Banks. The Federal Reserve System (Fed) supplies and regulates America’s money to all the banks. The Board of Governors is the main authority of the three branches of the Fed, and it supervises other banks. The Federal Open Market Committee is the most prominent policymaker of the three branches and regulates the supply of money in the economy. Federal Reserve Banks serve other banks, this is why they are called banker’s banks. There are twelve Federal Reserve Banks which represent different states and these “districts” share data for monetary policies. The future role of monetary policy is vital

The Federal Open Market Committee in the Federal Reserve System is who determines the monetary policies. The Federal Open Market Committee reviews economic and financial developments and determines the appropriate stance of monetary policy during their eight meetings per year. The Federal Reserve plays no role in determining fiscal policy. Fiscal policy refers to an economic strategy that utilizes the taxing and spending powers of the government to impact a nation's economy. It is different from monetary policy, which is usually set by a central bank and focuses on market interest rates and the money

There are twelve regional bank Federal Reserve Banks located in major cities throughout the nation. The federal government sets the salaries of the board’s seven governors. National chartered commercial banks are required to hold stock in the Federal Reserve Bank of their region, which entitles them to elect some of their board members. The Federal Reserve System has both private and public components to serve the interest of the public and private banks. It’s unusual in that the United States Department of the Treasury, an entity outside of the central bank, prints the currency used. The U.S Government received all the system’s annual profit, after a statutory dividend of 6% on member banks’ capital investment is paid, and an account surplus is maintained. In 2015, the Federal Reserve made a profit of $100.2 billion and transferred $97.7 billion to the U.S Treasury. The motivation for creating the Federal Reserve System was to address banking panics. The Federal Reserve System was also created to serve as the central bank for the United States. Also the Federal Reserve System was to spike a balance between private interests of banks and the centralized responsibility of

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.

The Federal Reserve System was founded by Congress in 1913 to be the central bank of the United States. The Federal Reserve System was founded to be a safer, more flexible, and more stable monetary financial system. Over the years, the role of the Federal Reserve Board and its influence on banking and the economy has increased. Today, the Federal Reserve System's duties fall into four general categories. Firstly, the FED conducts the nation's monetary policy. The FED controls the monetary policy by influencing credit conditions in the economy. The FED measures its success in accomplishing these goals by judging whether or not the economy is at full employment and whether or not prices are stable. Not only

The first tool the Federal Reserve has for influencing the economy is through the federal funds rate. This allows a change in interest rates which means that banks may have to pay a higher or lower interest rate to the Federal Reserve for borrowing money. If the rate is increased it slows down the economy because the cost for money and credit is increased as well, but if the rate is decreased the economy is more likely to grow because money then becomes more available for investment and growth. The second tool used to influence the economy is through the purchasing or selling of federal debt. Selling federal debt tends to slow down the economy because people are less likely to invest. Buying federal debt tends to help the economy grow by allowing

One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a

The Federal Reserve System is a central banking of the US Government, most commonly known as the Fed. A central bank serves as the banker to both the banking community and the government. It issues the national currency, conducts monetary policy, and plays a major role in

In 1913, the United States Congress created the world’s most powerful monetary system, called the Federal Reserve (Investopedia). It involves one central agency and twelve regional Federal Reserve Banks that are accountable for their designated areas in the United States (Investopedia). Its primary purpose was to establish a secure, malleable, and a solid financial system which was to prevent financial devastation during times of crisis (Investopedia). More specifically, prior to the creation of the Federal Reserve Bank, the United States had bouts of crisis that created panic among the citizens. In utter terror, people would withdraw their funds from their banks causing a domino effect of financial institutions being pushed out of business due to a deficiency of money (stlouisfed). Therefore, the Federal Reserve Act was endorsed as a resolution to crisis periods, providing a money supply that would balance the economy, and introduce Federal Reserve Notes as a form of new currency (stlouisfed). In essence, the Federal Reserve became fully responsible for developing a comprehensive banking system that would allow for a strong economy. Therefore, one must understand the structure, the function, and the future of the Federal Reserve Bank that continues to financially secure this great country.

The three main tools the Federal Reserve uses for monetary policy changes are open market operations, the discount rate, and the reserve requirements. The most important tool is the open markets because it involves the buying and selling of the government securities on the open market in or change the money supply and influence interest