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The Federal Reserve


The Federal Reserve System commonly known as "the Fed" is the central bank of the USA founded in 1913 (Carl, 1990). The Federal Reserve System operates in manner that conducts the monetary policy of the country by influencing credit and money conditions in the country's economy. The government through the Federal Reserve System uses the monetary policy as a tool of influencing the economy with the aim of achieving stability in the economy. The Fed therefore decreases or increases the supply of money to influence unemployment, rates of interest, inflation and growth in the economy. This basically how the Federal Reserve System operates in a view of ensuring an economic balance and stability for the United States of America (Bernanke, 2011).

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The Federal Reserve System comprises Federal Reserve banks which operate under the general supervision of the Governors' board based in Washington. The reserve banks have nine members in the directors' board that is put in place to oversee operations in their respective jurisdictions. Federal reserve banks are expected to generate income basically from earned interest on securities of the government that are attained in the course of the actions of the monetary policy of the Federal Reserve. Another source of income is gotten from the availability of services which are priced to depository institutions as expected of them by the Act of Monetary Control founded in 1980. The Federal Reserve Banks are on the contrary not operated for any gains in profit and every year they are expected to return to the United States Treasury the earnings which exceeded the operating and miscellaneous expenses of the Federal Reserve (Rik, 2005).

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Operations on Monetary Policy

The basic responsibility of the Federal Reserve System is to operate in a way that influences the flow of credit and money in the economy of the country. Therefore, the Federal Reserve Banks take part in this function in a number of ways in the United States of America. Initially, first of the entire group of twelve presidents in the various Federal Reserve banks work together with other seven members of the Governor's board as members of the FOMC; the Federal Open Market Committee. The president of New York Federal Reserve Bank works on a continuous basis while the other presidents in the other locations serve in terms of one year while rotating within the respective locations. The FOMC from time to time is expected to meet in Washington, D.C and establish policies based on sales and purchases of the government securities as conducted in the open market. Actions of the FOMC ultimately affect the availability of credit and money in the country's economy (Robert, 2008).

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At another level of operations, the directors' boards in the respective Federal Reserve Banks start changes in the rates of discount, interest rates on loans established by Reserve banks to the depository organizations at what is commonly referred to as the "discount window." The rates of discount variations should be ascertained by the Governor's Board. Each and every depository institution subjected to reserve requirements as described by the Federal Reserve can access the discount window. This includes mutual savings banks, loan and savings associations, credit unions and commercial banks (Rik, 2005).

Each individual Federal Reserve Bank operates with a staff of research which collects and analyzes economic data from a wide scope and interprets the prevailing situations and developments existing in the economy. This Research is very important in operations as it helps the FOMC in the preparation and implementation of money policy. Moreover, the research is crucial in making informed decisions as will be required of the Federal Reserve banks from time to time in matters pertinent to supervision and in other crucial areas. Many Reserve Banks make public these reports of research accompanied with analysis of the present issues in the economy in their locations in either a quarterly or monthly basis (Allan, 2003).  

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Regulation and Supervision

The Federal Reserve also executes a wide range of regulatory and supervisory authority in addition to the responsibilities of credit and money. This is basically over other operations of the state-chartered bank members and companies holding banks taking into account their operations in other destinations outside the country together with Edge corporations as well as foreign banks which carry out their operations in the United States of America. The Federal Reserve System is also mandated with writing important regulations for the main federal credit laws of the consumer. Some of the supervisory duties are delegated to the Federal Reserve Banks through the Governors' Board. The said responsibilities take into account the way field examinations are conducted as well as the manner in which inspections of foreign banks, bank hoofing companies and state-chartered bank members in the United States are administered and the power to approve particular types of applications of the banks and bank holding company (Marrs, 2000).

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Services to the Government

Another Federal Reserve area of operation is the performance of a number of services to the United States treasury through the reserve banks. This also includes international, other government and even quasi-government agencies.  Every year, billions of money are deposited to and also withdrawn by a number of agencies of the government from the United States Treasury operating accounts which are held by the Fed banks.  The Federal Reserve Banks therefore hold, in their chambers, guarantee for agencies of the government to get public funds deposited with private depository organs. Moreover, the Reserve Banks get for deposit to the accounts of treasury such items including federal taxes of unemployment, personal taxes on income withheld through deduction on payroll, corporate taxes on income and other Federal excise taxes (Marrs, 2000).

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The Federal Reserve Banks in addition issue and also redeems public debt instruments like Treasury securities and savings bonds. They have particular responsibilities for the allocation and delivery of securities of the government and for wire transfer of the securities. Moreover, the reserve banks are expected to make frequent payments of any interest on accrued obligations of the United States Treasury, Government-sponsored corporations and other Federal agencies (Allan, 2003).

Services to Depository Institutions

The Federal Reserve System incorporates wider roles touching on the services rendered to the depository institutions. The Federal Reserve Banks in this manner therefore is plays the role of distributing both paper money (currency) and coins to the depository organs and/or institutions to meet the cash needs of the public. At times when there is a heavy demand on cash, like in the festive seasons, institutions are given huge amounts of cash than ever by the Federal Reserve Banks. Contrary when the demand for cash is low, institutions are expected to deposit a lot of money in excess with the Reserve banks which is credited to their reserve accounts. Coin and currency obtained at the Federal Reserve Banks are counted and sorted out. Currency and coins which are considered unfit are destroyed and replaced with new ones obtained from the Treasury Bureau of Engraving and Printing and Bureau of Mint Department.   

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The Federal Reserve System also serves as a central system of clearing checks in its operations. An approximate number of eighteen (18) million checks are transacted annually. The Federal Reserve System makes use of high-speed machines for sorting and processes the checks, sends the checks back to the depository institutions where they were written from where payment can be transferred as indicated on the checks through the accounts maintained with the Federal Reserve Banks by the depository organs and/or institutions. Again, the Federal Reserve Banks and almost eight thousand depository outlets are connected electronically by way of the Communication system of the Federal Reserve Bank. This is a network in which depository organs can make money transfers and securities in a matter of little time nationwide. This is what is commonly called Wire Transfer (Rik, 2005).

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The Federal Reserve Banks together with their branches carry out operations clearinghouses which are automated. These are computerized facilities that permit the electronic transfer of payments amongst the depository organs which are participating.  The automated Clearinghouses are used basically to effect transactions that recur like payroll direct deposits and mortgage payments, and serve as a replacement of the procedure followed with checks. The Department of Treasury makes use of the automated Clearinghouses expansively to make up social security, vendor and payroll payments (Marrs, 2000).

Federal Reserve System and Its Future Role in Monetary Policy

Improve Functioning of Credit Markets

The Federal Reserve has a very big role to play in the future in the monetary policy. It is mandated with the responsibility of fostering financial stability and improving the functioning of credit markets. The future of the monetary policy is thus regulated by the Federal Reserve System where by its powers and expertise is indispensable for managing and preventing crises in finance.  The Federal Reserve System has initiates programs which helps in containing any damage to the wider economy. Therefore, the role of the Federal Reserve in monetary policy in the future is expected to incorporate all its tools in working cooperatively and closely with other agencies including the Treasury as required to improve the general performance of credit markets. The future roles will also be geared towards measures taken to prevent failure of such institutions that would cause a methodical damage as well as to foster the repair and stabilization of the system of finance (Bernanke, 2011).

Credit Risk and Credit Allocation

The Federal Reserve System will in future help in avoiding credit risk together with credit allocation.  The Federal Reserve's lender of final alternative responsibilities includes lending against collateral, gotten to the satisfaction of the respective Federal Reserve Bank.  The actions and roles taken up by the Federal Reserve must also aim at improving the credit and/or financial conditions in a broad perspective and not to allocate credit to sectors which are defined narrowly or the borrower classes. This way, the Federal Reserve will be playing a significant role in the future monetary policy. The decisions of the government to influence credit allocation are the fiscal authorities' province (Rik, 2005).

Monetary Stability

The Federal Reserve will again play a huge role in preserving monetary stability.  There have been exigent and unusual circumstances in the past while pursuing stability in finance. This includes securities or loans purchases that impact the size of the balance sheet and are likely to be experienced in the future and may be lat a more advanced level. The actions of the Federal Reserve System are therefore expected not to constrain the monetary policy exercise as required to promote maximum sustainable price stability and employment. Treasury puts in place a special mechanism of financing known as the supplementary program of financing. This mechanism is thus expected to help the Federal Reserve to control and manage its balance sheet. Therefore, the roles of the Federal Reserve will incorporate other arms to ensure effectiveness in the monetary policy (Robert, 2008). Moreover, the Treasury together with the Federal Reserve is finding legislation action to offer more tools which the Federal Reserve can put to use to sterilize any effects of its securities or lending purchases made on the bank reserves supply.

Resolution Regime for Financial Institutions

The Federal Reserve together with the Treasury Remain entirely committed to prevent the disorderly malfunction of systematically critical institutions of finance. To mitigate the risks of crises in future, the Federal Reserve in collaboration with the Treasury is expected to work with the congress to come up with a regime that will put the government of the United States in a position of tackle effectively and at an early stage the probable failure of any analytically important institutions and organs of finance. As part of the framework deemed important in these efforts, the legislation would be expected to give directives to the extent of the applicability of the role expected of both the Federal Reserve and other agencies of the government of the United States in the anticipated resolutions (Roger & John, 2006).











In conclusion, the Federal Reserve System is a very crucial unit of the United States of America. Its function is a well coordinated system of operations executed by Federal Reserve Banks who generate income on their own with no intents in making profits. The Federal Reserve banks are accountable to the Federal Reserve and are expected to send their annual reports for accreditation. The core duties and areas of operations include serving the Government and depository institutions in a number of ways as outlined in this paper. The continued stability and strong-economic existence is entirely tailored in the operations of the Federal Reserve without which there will be no good coordination and flow of money in the country. The Federal Reserve ensures checks and balances in all financial organs and institutions which offer services to the consumers (Allan, 2003).  The operations of the Federal Reserve are guided by research conducted by individual Federal Reserve Banks whose findings is useful in coming up with the monetary policy and assist in bank supervisory duties among other uses. The Federal Reserve therefore has a big role to play in the future on the monetary policy to improve credit markets and ensure monetary stability just to mention but a few.

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