Federal Reserve and the Open Market - Essay Example

tions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates; (2) supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers; (3) maintaining the stability of the financial system and containing systemic risk that may arise in financial markets; and (4) providing financial services to depository institutions, the U.S. 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 Reserves 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 Feds 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