Question

In 250 words. Share your impression of the Federal Reserve System and its main responsibilities. Did your knowledge about the Federal Reserve System increase?  What have you heard about the Federal Reserve’s actions in 2020? What type of policy does it implement: Fiscal or Monetary policy?

Answer 1

Federal reserve is the central bank of U.S. It was created in 1913 ,with the enactment of Federal Reserve Act. The main responsibilities of Federal Reserve are : 1. It has the responsibility of Fed to promote maximum employment , stable prices and a long term interest rate. 2. It should regulate or control money supply according to changing economic situations through expansionary or contractionary monetary policy 3. It should regulate the banking system of United States and maintain an effective payment system 4. Fed act as Government's Fiscal Agent 5. It has to supervise the commercial banks and set reserve requirements 6. It has the authority to print paper currency and its supply Federal Reserve System should increase money supply during a recessionary period. In order to promote the a stable expansion of economy during recession, Fed reduces the reserve requirements and discount rate and Fed purchase bond from public and commercial banks to increase money supply. Fed actions in 2020 due to the outbreak of corona virus are following 1. The Fed has cut the federal fund rate from 1.5 % to 0.25%. 2. Fed has started purchasing a massive amount of securities to smoothen market function and credit creation 3. Through Primary Dealer Credit Facility (PDCF) ,Fed will offer a low interest rate ( 0.25%) for loans up to 90 days to 24 large financial institutions known as Primary Dealers 4. The Fed has re- launched Money Market Mutual Fund Liquidity Facility. Federal Reserve System has to implement monetary policy . During inflation, Fed has to implement contractionary monetary policy to reduce money supply by raising interest rate. During recession , Fed has to implement expansionary monetary policy to increase money supply by lowering interest rate