Federal Reserve Monetary Policy


The Federal Reserve Act created in 1913, caused formation of present Federal Reserve Monetary Policy of the U.S. This act of the Congress fashioned its central system of banking aimed at safeguarding the US from fiscal failures by formulating and monitoring financial policies.  Federal Reserve Monetary Policy comprises of all the actions of the central bank to control the national economy by scheming the supply of money and thus ability of consumers to spend money and the availability of credits for businesses. The Federal Reserve System takes control of monetary policy by influencing operations of open market, discount rates plus reserve supplies.


The Federal Reserve Act of 1913 laid foundation for establishing twelve Federal Reserve banks in different districts, making each bank accountable for its district. These twelve banks were commanded by Federal Reserve Board of seven members, appointed by the president with approval of the Senate.  The name of The Federal Reserve Board was changed to the Board of Governors in 1930 and it worked in association with five representatives of the regional Federal Reserve banks and constituted the Federal Open Market Committee. This is the committee having utmost power on the fiscal policies of the Federal Reserve System.

Open Market Operations

The Federal Open Market Committee controls open market operations, involving buying and selling of U.S. Treasury securities. The aim of open market operations is to manage the prices of such US Treasury securities or try enhancing the supply of central reserves. Open market operations work as the most influential tools for the Federal Reserve to be in charge of fiscal policies.

The Discount Rate

Each commercial bank is obliged to borrow funds from the Central Reserve Bank assigned to it. The rate of interest at which commercial banks borrow from the central bank is known as discount rate. The regional Central Reserve Bank from which a commercial bank borrows funds is known as discount widow. Each Central Reserve Bank offers 3 discount window programs, with 3 different discount rates, namely primary, secondary and seasonal credit. To begin with, these discount rates are decided by the directors of respective regional Central Bank, the same are examined and accepted by the Board of Governors of the Federal Reserve System.

Reserve Requirements

Reserve requirements refer to the sum of reserve funds that each bank must keep readily available. The reserve requirements are directly decided by the Board of Governors by prescribing a ratio. This ratio is applicable to the sum of assets in possession of an entity which are measured as reservable liabilities. It is obligatory for that entity to set aside this ratio of reservable liabilities for any likely financial liability.

On Federal Reserve Monetary Policy

Monetary policy may prompt consumers and businesses to spend or invest more or it could force them to reduce their expense or investments by enhancing or reducing money supply. For instance, during recessionary trends or when unemployment is on the rise, the Central Bank prompts industries and consumers to spend more by lowering rates of interest with the intent of giving a boost to economy.  On the other hand when inflation is on the increase, it raises rates of interest in an attempt to contain inflation.


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