The Federal Reserve System: Purposes and Functions

 

 

The Board and the Reserve Banks share responsibility for supervising and regulating certain financial institutions and activities, for providing banking services to depository institutions and the federal government, and for ensuring that consumers receive adequate information and fair treatment in their business with the banking system.

A major component of the System is the Federal Open Market Committee (FOMC), which is made up of the members of the Board of Governors, the president of the Federal Reserve Bank of New York, and presidents of four other Federal Reserve Banks, who serve on a rotating basis. The FOMC oversees open market operations, which is the main tool used by the Federal Reserve to influence overall monetary and credit conditions.

 

The Federal Reserve implements monetary policy through its control over the federal funds rate, the rate at which depository institutions trade balances at the Federal Reserve. It exercises this control by influencing the demand for and supply of these balances through the following means:

 

1.  Open market operations which is the purchase or sale of securities, primarily.

 

2. U.S. Treasury securities, in the open market to influence the level of balances that depository institutions hold at the Federal Reserve Banks.

 

3. Reserve requirements which are requirements regarding the percentage of certain deposits that depository institutions must hold in reserve in the form of cash or in an account at a Federal Reserve Bank.

4. Contractual clearing balances which are amounts that a depository institution agrees to hold at its Federal Reserve Bank in addition to any required reserve balance.

5. Discount window lending which is extensions of credit to depository in­stitutions made through the primary, secondary, or seasonal lending programs.

 

The Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government.

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