The monetary policy, and the whole monetary system in the United States is controlled by the Federal Reserve, which is the central bank of this country. In other words the "Fed" is able to oversees the banking system and regulate the quantity of money in the economy. It was created in the 1914, after bank failures of 1907. It is run by the Board of Governors, which has seven members, including the chairman. Currently this position is held by Janet Yellen. The main headquarters is located in Washington D.C., and there are also 12 regional banks, each one with a bank president.
The first function of the monetary system is to regulate the banks and clear the checks, through making loans to the bank, we can maintain financial stability - …show more content…
This is the reason why we have the Federal Open Market Committee that meets every 6 weeks to discuss the changes to the monetary policy; it consists of Board of Governors, chairman and 6 Fed Reserve Bank Presidents. It is quite important that the Fed changes the Federal Funds rate by altering the supply of money.
Now let's think about the tools of the Monetary Control, first we have the discount rate, which is an overnight interest rate the Feds charges member banks for borrowed money, in the situation when there is an increase in money supply, the decrease in the discount rate encourages banks to borrow excess reserves, so money supply grows through money multiplier and lending by the banks. If we have a decrease in money supply in the economy, there is an increase in the discount rate, which automatically discourages banks to borrow excess reserves, they make fewer loans, money supply …show more content…
If there is an increase in money supply, there is a lower interest rate, banks are encouraged to lend the reserves out, money supply grow through the successive lending. On the other hand, when there is a decrease in money supply, the interest rates increases, banks hold more to money in reserves and loan at less.
The last tool that I would like to talk about is the most common tool - Open Market Operations.The Fed buys and sells existing U.S. government bonds in the open market . To increase the money supply Fed buys government bonds from the banks , banks receives reserves for the bonds, which also means that they are able to make more loans. In this case the Fed fund rate falls and at the same time money supply grows.
In contrast of that to decrease the money supply in the economy, Fed sells the U.S. government bonds to banks, which pay money for the bonds. After that Fed removes money from the banking system, banks have fewer excess reserves to make loans, Fed funds rate increases and money supply
The first function of the monetary system is to regulate the banks and clear the checks, through making loans to the bank, we can maintain financial stability - …show more content…
This is the reason why we have the Federal Open Market Committee that meets every 6 weeks to discuss the changes to the monetary policy; it consists of Board of Governors, chairman and 6 Fed Reserve Bank Presidents. It is quite important that the Fed changes the Federal Funds rate by altering the supply of money.
Now let's think about the tools of the Monetary Control, first we have the discount rate, which is an overnight interest rate the Feds charges member banks for borrowed money, in the situation when there is an increase in money supply, the decrease in the discount rate encourages banks to borrow excess reserves, so money supply grows through money multiplier and lending by the banks. If we have a decrease in money supply in the economy, there is an increase in the discount rate, which automatically discourages banks to borrow excess reserves, they make fewer loans, money supply …show more content…
If there is an increase in money supply, there is a lower interest rate, banks are encouraged to lend the reserves out, money supply grow through the successive lending. On the other hand, when there is a decrease in money supply, the interest rates increases, banks hold more to money in reserves and loan at less.
The last tool that I would like to talk about is the most common tool - Open Market Operations.The Fed buys and sells existing U.S. government bonds in the open market . To increase the money supply Fed buys government bonds from the banks , banks receives reserves for the bonds, which also means that they are able to make more loans. In this case the Fed fund rate falls and at the same time money supply grows.
In contrast of that to decrease the money supply in the economy, Fed sells the U.S. government bonds to banks, which pay money for the bonds. After that Fed removes money from the banking system, banks have fewer excess reserves to make loans, Fed funds rate increases and money supply