Question

Ill. The Federal Reserve System A. Illustrate the primary role and functions of the Federal Reserve System using specific examples. For example, what are its key macro-activities and their economic consequences? B. Explain the operational mechanics of the Federal Reserve System in terms of its structures and governance using specific details. In other words, how does the system work on a day-to-day basis? C Illustrate the potential for the Federal Reserve's monetary policies to impact capital markets using specific examples. For example, how can the Federal Reserve "make waves in capital markets through their communications or lack thereof?

Answer 1

A. The Primary function of federal reserve and its economic consequences are: • Conducting monetary policy: One of the main functions of the federal reserve is to conduct the monetary policy of the country in such a way that it promotes employment, stable prices in the economy. A stable and effective monetary policy can boost the growth of economy. Stability of the financial system: The federal reserve has to make sure that the financial markets and systems are working efficiently and stable It does this by putting effective risk management practices for the banks and non-banking financial institution. An efficient financial market is very important for the sustainable growth of the economy. Promoting the safety and soundness of the Individual financial system: The federal reserve regulates the banking sector in the economy. Banks play a key role in having a stable financial market and lending for the investment purposes. Federal reserve has to make sure that these institutions are stable and in healthy condition so that they contribute to the growth of the economy. • It also makes sure that the transaction in the economy are happening in a safe way and there is no fraudulent activity. • Being the central bank of a country, the federal reserve also has to make sure that it protects the interest of consumers and promotes their development. B. The federal reserve system consists of three key entities- federal reserve board of governors, Federal reserve banks and federal reserve open market committee. The board of governors provides guidance for the system oversees the federal reserve banks; they report directly to the congress. Federal open market committee sets the US monetary policy and maintain stable prices in the economy by using the interest rate as tool. There are 12 federal reserve banks through which it operates and these banks are supervised by the board of governors. C. The potential of federal reserve to impact the capital markets is significant through its monetary policies. Monetary policy sets the tone of the Interest rate and in interest rates in turn determine the growth of the economy to at certain extent. Let's say that the market expectation of the federal reserve is to increase the Interest rate by 50 basis points but federal reserve did not increase the rate by 50 basis points or it increased by only 20 basis points it will creates significant waves in the market and market will rally upwards.