Federal Reserve monetary policy


It was 1913, when the current system of Federal Reserve was created through Federal Reserve Act. This step was taken in order to create a banking system so that the financial catastrophes could be avoided in the US and so that the monetary policies could be regulated in the national interests. Monetary policy is in fact a calculation that is made in order to meet all economic objectives. Central bank of the country is responsible for controlling the amount of credit and the price of the money with respective supply. This is Federal Reserve that controls the policies related to monetary systems in the operations of the open market. It is also responsible for measuring the rate of discount and the likely requirements for reserves.

History of Federal Reserve:

About 12 regional banks were established for Federal Reserve under the 1913 act of Federal Reserve. In this system, every bank is solely responsible for its sections in the country. The banks on the regional level were supervised by the Reserve Board with seven members. In this board the president appointed the seven members which were later got approval from the senate. Later, in 1930, this board was named as “Board of Governors”. The five members of the federal bank served with the board of governors to establish the Federal Open Market Committee. This committee undoubtedly has great effect on the monetary policy in the reserve system working at federal level.

Operations in the open market:

Federal open market committee controls all the operations in the open market. It is also based on the treasury securities of US which regulates the selling and buying. The aim of the open market is to boost the Federal Reserve supplies. Its objective is also to regulate the prices of the treasury securities of US. Operations of the open market work as the most efficient tools for Federal Reserve in order to control the monetary policy.

The Discount Rate

Commercial banks in a country have to have a loan of money from the regional Federal Reserve Bank. The interest rate on which the commercial banks get the money is called the discount rate. Discount window is the money that every commercial bank gets from the regional bank. Every federal bank constitutes three different window programs at three completely separate discount rates. These programs are called, primary, secondary and seasonal credit. The rates of discounts are set according to the directions from the regional bank but the discount rates can be reviewed later and got approved from the governor’s board of the federal system.

Requirements for reserve:

The amount of all the reserves is determined by the requirements of the reserve that is controlled or handled by every bank. The reserve requirements are directly controlled by the BOG that appears in the shape of a ratio. The ratio is directly applied on the assets of an institution which are called the reservable liabilities but this ratio is kept aside to deal with the financial liabilities.

Expansionary or contractionary monetary policy:

Monetary policy can be either contractionary or expansionary. But this classification completely depends on the policy which can either increase or decrease the money supply. In the days of recession, Federal Reserve takes up an expansionary policy which lowers the interest rate and let the economy of the country going. But when the inflation is high in the country, the Federal Reserve adopts a contractionary policy which increases the rates of interest and inflation goes down.


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