The Federal Reserve: structure and policy functions

Federal Reserve Board is the most powerful financial institution in the country and is actually the Central bank of United States. This institution is responsible for regulating financial system of the country by formulating monetary policies and by changing the fund rates. The Fed is not completely independent and works together with the administration and the Department of the Treasury. It is responsible for formulating and implementing monetary policies in the United States. Even though not independent Federal Reserve has the power to single-handedly introduce appropriate regulations and changes in order to control the financial markets. Federal Bank is commonly referred to as the Fed and it has lately been in the news quite consistently and persistently. The headline-making monetary measures have made the public take notice of the way monetary system works in the United States.

USA Business in its (1995) issue wrote, "The Fed exercises control over money and financial markets using a limited range of indirect tools: open market operations, discount rates, reserve requirements, and margin requirements. Open market operations - consisting of the buying or selling of U.S. government securities, usually on a short-term temporary basis, to either reduce or increase the amount of free cash in the system - are the most frequently used means of fine-tuning financial activity."

The activities of Federal Reserve Board increased in the last few years because it was forced to bring down interest rates after consumer spending and investment collapsed, thus adding to the economic problems of the country. It is very important to understand that changes in the Interest rates is the most powerful regulatory tool used by the Fed to bring changes in the financial markets of the country and therefore Fed slashed interest rates 11 times last year. Federal fund rates are in sole control of the Federal Reserve Board and thus this central banking body can easily alter the fund rates as many times as it deems necessary. Federal fund rate is defined by David L. Scott as, "The rate of interest on overnight loans of excess reserves among commercial banks. Because the Federal Reserve has significant control over the availability of federal funds, the rate is considered an important indicator of Federal Reserve monetary policy and the future direction of other interest rates. A declining federal funds rate may indicate that the Federal Reserve has decided to stimulate the economy by releasing reserves into the banking system." Any change in the federal fund rates should ideally produce a positive result by increasing the demand for money by investors and businessmen. Let us see how Federal Reserve Board used interest rates as a regulatory tool. When more money is to be pumped into the market, it is important to encourage investment and consumer spending. In the last five years, United States has faced numerous problems in the economy and the government was stupefied when it realized that its highly successful financial system had granted immense powers to the financial markets, which refused to come under control of the Treasury. But in such conditions, the only two tools that could be used for regulation purposes were taxes and Interest rate. And therefore Federal Board decided to bring down fund rates some 450 points last year. The primary reason why interest rates were reduced some 11 times in 2001 was because the government wanted to encourage businessmen to invest more. But we have noticed that Interest rates were not a very powerful regulatory force as the investors continued to stay away from further borrowing because of low consumer sending in the country and decreased exchange value of dollar. They were of the view that goods would get wasted in the market if there were not enough consumers to buy them, on the other hands consumers were not willing to spend more because of high inflation and lower purchasing power.

Thus it is clear that Federal reserve Board has the most powerful role to play when it comes to regulation of financial markets and the changes in the past few years has increased its activities. Financial system of the United States is such that it has given extra powers to the financial markets and while it promotes growth and supports entrepreneurial talent on the one hand, it diminishes the powers of the government on the other.