Macroeconomics - power of the federal reserve in monetary policy Term Paper

Macroeconomics - power of the federal reserve in monetary policy - Term Paper Example The paper provides a brief overview of some recent actions that are taken by Federal Reserve. Federal Reserve is one of the most powerful institutes in terms of its capability of significantly influencing the monetary policy of United States of America. The primary mission of Fed is to make sure that sufficient money as well as credit is available and a sustainable economic growth is maintained without inflation. The organization has the power of slowing down the growth of money supply into the financial system when the inflation is likely to threaten the purchasing power of the common mass. The Fed has three tools to influence the monetary system and these are ‘discount rate’, ‘open market operations’ and ‘reserve requirements’ (Federal Reserve Bank of Dallas, n.d.). Among these ‘open market operations’ can be considered as the Fed’s main tool for influencing the monetary policy. There is a committee named Federal Open Market Committee (FOMC) that is responsible for developing monetary policies that are based on â⠂¬Ëœopen market operations’ (Federal Reserve, n.d.). In open market operations, US government securities are bought and sold in the open market. The primary objective of such buying and selling is to influence the short-term interest rate and the growth of credit and money. Once the policy is developed by FOMC, the Federal Reserve Bank of New York takes the responsibility of implementing it. The second most important tool is the ‘discount rate’ which is nothing but the interest rate that is charged by the Fed from different financial institutions against short-term loans. The third one i.e. the reserve requirement is the amount that the financial institutions have to keep aside as ‘reserve’. If the ‘reserve requirement’ is raised by the Fed then the banks are likely to have less money for lending and as a result the growth of money