The Federal Reserve Essay Example | Topics and Well Written Essays - 2000 words - 1

The Federal Reserve - Essay Example The effectiveness of the role of the Federal Reserve System lies in the monetary policies of the bank. The responsibility of designing appropriate monetary policies is bestowed on the Federal Reserve System by the Federal Reserve Act in order to ensure availability of money and liquidity in the economy and to arrange for provision of affordable cost of credit in order to fulfil the national economic goals. The monetary policies of the Federal Reserve System are aimed at sustaining the level of productivity and create a balance between the supply and demand. The responsibility of the Federal Reserve System also encompasses controlling of inflation rates by fixation of appropriate interest rates in the financial system. The basis of the monetary policies of the Federal Reserve System lies in the inter bank lending policy (Mankiw, 2011). During the phase of revival from the period of recession in the current economy, the Federal Reserve System modified its monetary policies in order to boost consumption demand in the economy by undertaking policies to inject sufficient flow of funds. The interbank rates depend on the Federal fund rate which is determined by the Federal Reserve System. ... The discount rate is determined by the Federal Reserve System looking at the demand of the economy and providing credits to the banks in required rates to fulfil the demand of liquidity in the economy. The reserve fund requirements are the deposit base held by the banks as a statutory requirement with the Federal Reserve System. The decrease in the reserve requirement as determined by the Federal Reserve policy would help to inject more liquid funds into the economy. The current economic conditions which showed a financial crisis led to the need of increased direct lending by the banks and financial institutions (Allen, 1999). The Federal Reserve System played an important role in determining appropriate inter bank rate to encourage increase in lending for the business. This has been done through increase in open market operations by the Federal Reserve System that has led to the increase in the flow of liquidity ion the economy. A higher level of production in the current economic c onditions has created the stage for revival of the economy. This in turn has led to the rise in income levels of the people thereby boosting the spending in the economy. As the banking system was severely hit during the current economic recession, the Federal Reserve System adopted measure to increase the credit to organisations other than banks. The central bank engaged in liquidity swaps with the other central banks of other countries. The usage of derivative products raised giving hope to the recovery of economic conditions. Thus the roles and responsibilities of the Federal Reserve System have been highly significant in establishing a position of stability for the current economy. It is through the policies of the Federal Reserve