The Federal Reserve and Monetary Policy

[Name of the institute]

Federal Reserve System, Its Tools and Monetary Policies

Federal Reserve System and Its Influences

Federal Reserve decision makers are primarily responsible to formulate the monetary policy. The board members cannot influence directly on inflation, employment rate, the money supply and interest rates, but have indirect tools to control these factors. The monetary policies are designed with a concern that they can affect the money supply and other economic activates as desired by the board members (FRB, 2013). The policy makers use their capability of setting reserve requirement, incorporation with reserve banks in setting discount and federal funds rates policies and different open market operations, are the main monetary policy tools to indirectly control various economic activities (Bouman, 2001). By changing the reserve requirement, the money supply could be controlled. Every bank needs to keep a certain percentage of the deposited amount in reserve, usually 10%; with a change in this percentage the money supply can be influenced.

Even with the help of discount and federal fund rate, board can control the money supply. Banks pay interests to the Federal Reserve according to the discount rate. When there is high discount rate, banks would borrow lesser money from the Federal Reserve and eventually there would be an indirect decrease in the money supply. The interest rate charged by commercial banks from each other is defined as federal fund rate if Federal Reserve decreases the discount rate, banks would borrow lesser money from each other, and that is why there would be an increase in the money supply and federal fund rate (interest rate) also depends upon the funds provided by the Federal Reserve, for instance when there are more funds federal fund rate would decrease.

Moreover, with the help of such tools, Federal Reserve either ...