The Federal Reserve

The Federal Reserve

Introduction

Almost everyone is aware of the existence of the government body which performs as the economy guardian. This guardian of the economy is an economic sentinel that enforces policies determined so that economy of the country operates smoothly. Regrettably, majority of the investors does not realize regarding the involvement of the government in the country's economy.

In U.S., this responsibility is with Federal Reserve - Fed. It is consider as the U.S. economy gatekeeper. Feb is the U.S. government bank which influences U.S. financial Institution. Feb keeps an eye on latest economy of the world, and hence is one of the most powerful organizations on globe.

Discussion

Role & Effectiveness of the Federal Reserve in Stabilize the Current Economy

Federal Reserve acts as the central bank of U.S. The main objective and role of Federal Reserve is to promote maximum employment, stability in prices and track over the interest rate within the country (Schabert A., 2008).

As Feb has three main responsibilities, these responsibilities have helped in stabilizing the current economy of U.S. Through providing and maintaining the effective payment system which blocked during financial crisis, supervising and regulating banking operation and hence proper implementation of monetary policy, U.S. has overcome majority of their losses in the recent economy. The board of Feb is appointed by president and senate approved this board. This action is taken due to administer reserve banks & 12 districts branches across the globe.

The role of Feb is to keep track on the buying and selling of U.S. Government Securities and in order to stabilize the current economy, they have conducted the open market operation for risk assessment to the accomplishment of their long run goals of price-stability and sustainable economic-growth (Heer & Schaberty, 2000).

The target federal funds rate has been maintained through OMO, this rate is not usually set up by Feb but OMO can influence this rate, as bank purchases the securities by Fed, then the fund within the bank is less and the interest rate increase due to higher demand for loan and if Feb purchases this back from Bank then, bank will be having more money to lend, decreases in overall interest rate. In order words, through maintaining the interest rate by Feb, this has improved the U.S. economy and has influence the short term interest rate and money growth and credit. The other technique through which Fed influence the U.S. economy is the discount rate and reserve requirement adjustments and performing as a lender. This is the rate which is charged on the short term loan by the Fed charged from the banks (Schabert A., 2004).

The reserve requirement of the bank is the percentage that bank has to keep aside. If this rate is increased by Fed, the bank would be having less money to loan out and this will hinder the money supply growth and overall economy activity, but then, if the rate is lower than bank would be loaning our more, and hence more money in ...