The Federal Reserve

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The Federal Reserve (Fed) is an important player in the economy of the United States as it is the main government agency which is tasked to oversee the entire banking system and has control on monetary policies. It should be noted that Fed uses its discretionary power in order to stimulate, stabilize, or even bring the economy into slow down.


Monetary policies are conducted through open market purchases, changing the discount rate, and determining the reserve requirement among banks. The main premise of any monetary policy instituted by the Fed is that any change in the money supply will consequently affect aggregate demand, price level, and the GDP deflator.
Open market purchases allow Fed to buy and sell T-bills and T-bonds at discounts in order to take advantage of the gains from the purchase price and maturity value. These instruments are generally considered as less risky investments as they assure Fed of a sure yield at maturity dates.
Fed, with its discretionary power, can also opt to purchase and sell stocks. However, as Fed is mandated is act like a "prudent person" and limit itself to less risky financial instruments, it will not engage in such operations. Accordingly, Fed is not allowed to enter in transactions that a prudent man will not undertake. It should be noted that stock markets like the NYSE are highly volatile and stocks are high risk investments. Selling and buying stocks will expose Fed into the risk of losing all its investments with the failure and collapse of business organizations. ...
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