The Federal Reserve






The Federal Reserve

ECO 561
December 2, 2013

The Federal Reserve
The Federal Reserve System, which some refer to as the Fed, will celebrate its 100th birthday just before Christmas this year. It was created by the Congress of the United States to provide the nation with a safer, more stable currency and economy. The Fed’s responsibilities have been further defined to include:
Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.
(Board of Governors of the Federal Reserve System, 2013)

The Fed uses several tools to accomplish these responsibilities including:
Open Market Operations – The purchase and sale of securities in the open market by a central bank – Used to adjust the supply of reserve balances so as to keep the federal funds rate--the interest rate at which depository institutions lend reserve balances to other depository institutions overnight--around the target established by the FOMC.
Discount Rate – The interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility – This allows banks a short period to absorb large transactions in a regular fashion.
Reserve Requirements – The amount of funds that a depository institution must hold in reserve against specified deposit liabilities – Raising the requirements has the...