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Federal Reserve Term Paper

Federal Reserve Board is the most powerful financial institution in the country and is actually the Central bank of United States. This institution is responsible for regulating financial system of the country by formulating monetary policies and by changing the fund rates. The Fed is not completely independent and works together with the administration and the Department of the Treasury. It is responsible for formulating and implementing monetary policies in the United States. Even though not independent Federal Reserve has the power to single-handedly introduce appropriate regulations and changes in order to control the financial markets. Federal Bank is commonly referred to as the Fed and it has lately been in the news quite consistently and persistently. The headline-making monetary measures have made the public take notice of the way monetary system works in the United States. USA Business in its (1995) issue wrote, "The Fed exercises control over money and financial markets using a limited range of indirect tools: open market operations, discount rates, reserve requirements, and margin requirements. Open market operations - consisting of the buying or selling of U.S. government securities, usually on a short-term temporary basis, to either reduce or increase the amount of free cash in the system - are the most frequently used means of fine-tuning financial activity."

The activities of Federal Reserve...

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It is very important to understand that changes in the Interest rates is the most powerful regulatory tool used by the Fed to bring changes in the financial markets of the country and therefore Fed slashed interest rates 11 times last year. Federal fund rates are in sole control of the Federal Reserve Board and thus this central banking body can easily alter the fund rates as many times as it deems necessary. Federal fund rate is defined by David L. Scott as, "The rate of interest on overnight loans of excess reserves among commercial banks. Because the Federal Reserve has significant control over the availability of federal funds, the rate is considered an important indicator of Federal Reserve monetary policy and the future direction of other interest rates. A declining federal funds rate may indicate that the Federal Reserve has decided to stimulate the economy by releasing reserves into the banking system." Any change in the federal fund rates should ideally produce a positive result by increasing the demand for money by investors and businessmen. Let us see how Federal Reserve Board used interest rates as a regulatory tool. When more money is to be pumped into the market, it is important to encourage investment and consumer…

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Financial Institutions., USA Business, 05-31-1995.

David L. Scott, federal funds rate., Wall Street Words, 01-01-1988

Fed's Ferguson: Monetary Policy Still 'Accommodative'" DOW JONES NEWSWIRES, Wall Street Journal online October 29, 2004 3:22 P.M.
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