Question

How does the Federal Reserve System perform its functions and what instruments of policy does it use?

Answer 1

The Federal Reserve System is the central bank of the United States. The Federal Reserve System performs its functions by the following ways:

--conducting the nation's monetary policy to enhance the jobs, stabilisation of prices, and moderate long-term interest rates in the economy of U.S.;

--promoting the stability of the financial system and seeks to reduce and contain systemic risks through the way of active monitoring and engagement in the nation and abroad;

--promoting the safety and soundness of individual financial institutions and closely monitoring their impact on the financial system in the U.S. as a whole;

--fosters payment and settlement system efficiency and safety by the way of services to the banking industry and the government of the country that facilitate U.S. dollar transactions and payments; and

--promoting community development and consumer protection through the way of consumer-focused supervision and examination, research and analysis of emerging buyer issues and trends, activities related to community economic development, and the administration of consumer laws and regulations

The main instruments are open market operations through the purchase and sale of government securities; discount policy through controlling the price and quantity of discount loans to banks; and reserve requirements through setting the percentage of deposits that bank must hold in reserve.