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Federal Reserve and the Open Market - Essay Example

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Federal Reserve and the Open Market

government, and foreign official institutions, including playing a major role in operating the nation's payments system (Federal Reserve, 2006).
It is important to note that the Fed is not a commercial bank and, therefore, does not operate as such. However, similar to any other bank that has interest as their primary source of income, "the Federal Reserve's income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations" (Federal Reserve, 2006). Other sources of income, according to the Fed's official website, are the following: interest on foreign currency investments held by the System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions.
The Federal Reserve System is separated into four main divisions, each with their own set of responsibilities: the Board of Governors, the Federal Open Market Committee, the Federal Reserve Banks, and the Board of Directors.

The Board of Governors, which consists of seven members, is mostly responsible for "the formulation of monetary policy" (Federal Reserve, 2006). These seven are also part of the Federal Open Market Committee, which is responsible, on the other hand, for any decision-making regarding "the cost and availability of money and credit in the economy" (Federal Reserve, 2006).

The Federal Open Market Committee "is the most important monetary policymaking body" of the Fed. Besides being responsible for policies directed toward economic growth, among other things, it is this particular department that is in charge of making decisions regarding open market operations.

The Federal Reserve Banks, which were also created by the Congress, is mainly responsible for the operations of the central banking system of the United States. These banks, among a number of responsibilities, "hold the cash reserves of depository institutions and make loans to them. They move currency and coin in and out of circulation, and collect and process millions of checks each day" (Federal Reserve, 2006). The Federal Reserve Banks and divided into twelve separate districts, each in the following areas: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

The Federal Reserve Banks are taken charge of by the Board of Directors, all nine of them, in the same way that each bank branch is managed by their own Board, which is composed of five to seven directors.

Open market operations are just one of the monetary tools that the Fed employs. Through this particular tool, the Fed is able to "directly affect the level of reserves in the banking system" (Federal Reserve ...Show more


The Federal Reserve System of the United States of America is more commonly known as the Federal Reserve or the Fed. In essence, the Fed is the central bank of the United States, which is "created by Congress on December 23, 1913 with the signing of the Federal Reserve Act by President Woodrow Wilson] to provide the nation with a safer, more flexible, and more stable monetary and financial system" (Federal Reserve, 2006).
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