Federal Reserve Primary Functions

Topics: Monetary policy, Federal Reserve System, Central bank Pages: 3 (796 words) Published: January 31, 2011
Federal Reserve Primary Functions and the Effect its Policies Have on Financial Markets and Institutions
This nation consists of many financial institutions but none are as powerful as the Federal Reserve System and the member banks that own it. The Federal Reserve System’s role as the nation’s central bank ensures that it wields an enormous amount of power and influence on anything to do with money and finances. The Federal Reserve’s policies and actions directly affect the nation’s interest rates, money supply, availability of credit, and inflation rates, all of which impact financial markets and institutions. The following paragraphs will address the Federal Reserve’s primary functions as well as describe the effects its policies have on financial markets and institutions and will include the effect it has on interest rates. Primary Functions

Several monetary institutions formed in the United States prior to the Federal Reserve but none had the staying power that was necessary and failed, (Timberlake, 2008). The current Federal Reserve was originally established by the Federal Reserve Act in December 1913 and was designed “to furnish an elastic currency”, (Timberlake, 2008), for notes, drafts, and bills of exchange that resulted from actual commercial transactions. The Federal Reserve of today is quite unrecognizable compared to what it started out to be, however its primary functions have not changed. The Federal Reserve was initially put in place to stabilize the country’s banking system, to provide an elastic money supply, improve the banking regulation system as well as the nation’s payment system. The most important function of the Federal Reserve is to establish national monetary policy, open market operations affecting the amount of reserves in the banking system/money supply, and the discount rate at which it lends funds. The Federal Reserve is important in helping to maintain the economical balance of this nation. Federal Reserve Effects on...

References: Timberlake, R.H. (2008). Federal reserve system. Retrieved November 4, 2010 from http://www.econlib.org/library/Enc/FederalReserveSystem.html
Heakal, R. (n.d.). Formulating monetary policy. Retrieved November 5, 2010 from http://222.investopedia.com/articles/04/050504.asp#12892501740691&close
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