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Federal Reserves Policy. Past, Present and Perspectives - Coursework Example

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The author of the paper "Federal Reserves Policy. Past, Present, and Perspectives" paper addresses the topic of Federal Reserve’s Policy by overlooking its past and current policy and finally, drawing some perspectives on its future course of action. …
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Federal Reserves Policy. Past, Present and Perspectives
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Download file to see previous pages The Federal Reserve has the following key roles in the economy. Firstly, it is the regulator of the banking system and has as the primary goal of the health of this system. In order to fulfill its objective, the Fed is a monitor of the financial condition of banks that operate in the United States, and also it facilitates interbank transactions and operations.

Secondly, the central bank is the sole supplier of currency, and the money supplied is considered legal tender by law. Although, in the past the money supplied was backed by gold or other metals, nowadays the value of money is given by the purchasing power of it. Furthermore, the Fed is the holder of the nation’s gold and foreign exchange reserves.

Another role is to act as a bank’s bank, which means providing lending to banks from the banking system. Highly connected with this role is the lender of last resort role i.e. Fed can save banks which are in financial distress, in order to maintain the stability of the overall system (Mankiw 330). More about this role it will be discussed later in the paper when considering the financial crisis, and the measures are taken by the Fed. Also, the Fed's role as a central bank is to supervise the payments system in order to ensure smooth operations of domestically and international clearing systems.

Moreover, the Fed is responsible to conduct the monetary policy by considering the quantity of money available in the economy i.e. money supply. Most specifically, the monetary policy falls under the responsibility of the Federal Open Market Committee (FOMC), which also has the role to consider changes in the money supply.

The Fed publishes two monetary aggregates M1 and M2, which are a measure of different types of liquidity. The monetary aggregate M1 measures the most liquid form of money and includes currency, traveler’s checks, demand deposits and check deposits (Kohn 134). The monetary aggregate M2 is formed from M1, savings accounts, time deposits with amounts under $ 1000,000, as well as balances in money market mutual funds. ...Download file to see next pagesRead More
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