Federal Reserve System Essay

1052 words - 5 pages

Federal Reserve System is an independent agency of the United States government that helps oversee the nation's banking system. The Federal Reserve System is known as the central bank of the United States. Its most important job is to assist the U.S. government in managing the economy by encouraging economic growth and controlling inflation. It pursues these goals by influencing interest rates and, the availability of money and loans. The program the Fed follows in influencing interest rates is called its monetary policy. The Fed also performs many financial services for the federal government and provides numerous services to commercial banks.History: Congress established the Fed in 1913 ...view middle of the document...

It sets the Fed policy for trading government securities. Government securities include Treasury bills, Treasury bonds, and Treasury notes. The committee consists of the Fed governors, the president of the New York City FRB, and the presidents of four other FRB's.The Fed operates more independently of the President and Congress than do typical government agencies. A President appoints only two Fed governors during a four-year period unless additional governors resign or die. The Fed gets no funding from Congress. It raises all its operating expenses from investment income and fees for its services. It pays no interest to banks on cash reserves banks keep at the Fed. The Fed reports to Congress about its proposed policies but is legally free to make its own policy decisions.Managing the economy. The Fed promotes economic stability by working to keep interest rates low in recessions and letting interest rates rise in periods of rapid economic expansion to control inflation. The Fed can influence interest rates in three main ways. It can conduct open-market operations, change reserve requirements, or change the discount rate.Open-market operations are the sale or purchase of government securities by the Fed. The Fed sells securities if it wants to increase interest rates. Payments for the securities are drawn on banks, leaving the banks less money to loan. As a result, banks raise their interest rates on loans, and fewer people can afford loans. To attract more funds, the banks also raise the interest rates on deposits in savings and similar accounts. In addition, when the Fed sells securities, the supply of bonds increases, and so issuers of bonds must compete harder for investors' money. As a result, the interest rates on bonds rise. The Fed buys back government securities if it wants to reduce interest rates.Reserve requirements are percentages of deposits that almost all deposit-taking institutions must set aside either as curre...


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