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The Federal Reserve System and Monetary Policy
The Federal Reserve System or the Federal Reserve is the central bank of the United States of America and was established in 1913 after enacting the federal reserve act. The Federal Reserve system came about due to financial panics in the past and the need to have federal control over the monetary system in the US. Over the past century, the Federal Reserve has grown enormously after events like the great depression in the 1930s and the recession of the 2000s.
The Federal Reserve promotes the effective operation of the US economy and performs five key functions that include:
- Conducting the country’s monetary policy to moderate long-term interest rates and promote stable prices and maximum employment.
- Promotes individual financial institutions’ soundness and safety and closely monitors their effect on the financial system in general.
- Encouraging the payment and settlement system efficiency and safety through services to the US government and banking industry helps US-dollar payments and transactions.
- Promotes community development and consumer protection through focused consumer examination, research, and analysis of developing consumer trends and issues, administration of consumer laws, and community economic development activities.
Three critical entities within the federal reserve system serve the public interest.
- The federal reserve board of Governors- is an independent agency of the federal government.
- The Federal Open Market Committee- comprised of the members of the Board of governors and reserve bank presidents.
- The Federal Reserve Banks- are the arms of the federal reserve system and are supervised by the Board of governors.
Structure of the Board of Governors of the federal reserve
The Board of Governors of the federal reserve comprises seven members or governors who are nominated by the president of the United States and confirmed by the senate. They serve a full term of 14 years, with every term starting on February 1 of even-numbered years. The president selects the chairman and the vice-chairman of the Board of Governors. They each serve a term of four years. It is important to note that the term of a member on the Board is not affected by his/her status as the vice-chairman or the chairman.
The Federal Reserve Board is located in Washington DC, and the Board of governors is the governing body of the federal reserve system. The Board of governors guides the federal reserve system’s operation so that the goals and responsibilities given to the federal reserve are achieved. All seven governors/members serve on the Federal open market committee(FOMC). The primary responsibility of the Board is to oversee the operations of the twelve Reserve banks. They provide direction, guidance, and oversight when reserve banks lend to other institutions.
The Federal Open Market Committee(FOMC) is a federal reserve system that sets the national monetary policy. Monetary policy in the US includes the Federal reserve’s actions and communications to promote stable prices, maximum employment, and moderate long-term interest rates. The federal open market committee makes every decision regarding the conduct of “open market operations.” FOMC was created in 1933 and 1935 after enactment by congress. FOMC is comprised of twelve voting members and can determine its internal organization. The committee is mandated with overseeing open market operations, which is the primary tool that the federal reserve executes US monetary policy.