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Federal Reserve System
The Federal Reserve System was created in 1913 and is the central bank of the United States. "It was created by Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system" (Federal FAQ, 2006). The Federal Reserve has four general areas of responsibilities including, conducting the nation's monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system, and providing certain services to the U.S. government, to the public, and to financial institutions (Federal Reserve Board, 2005). This paper will give some insight into the Federal Reserve System and its policies.
Federal Reserve Monetary Policy
The term "monetary policy" refers to the actions undertaken by the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals (Federal, 2007). The Federal Reserve influences money and credit conditions in the economy in pursuit of full employment and stable prices. The Federal Reserve uses open market operations, discount rate, and reserve requirements as the three tools to govern the monetary policy.
Open Market Operations ? purchases and sales of US Treasury and federal agency securities are the Federal Reserve's principle tool for implementing monetary policy.
The short term objective for open market operations is defined by the federal open market committee. This objective can be a desired quantity of reserves or a desired price. The desired price is the federal funds rate, currently 5.25 basis points (Open Market, 2007).
The discount rate is the interest rate charged to commercial banks and other dep ...