Question

1. Explain the following a. Components of the Federal Reserve System. b. Why did US establish a decentralized Federal Reserve? c. Special Role of the New York Federal Reserve d. Composition and functions of the FOMC

Answer 1

1) The Federal Reserve System has three components discussed as below:

Federal Reserve Board of Governors: It is an agency of the federal government who is directly accountable and reports to Congress, gives general guidance for the System and also oversees the twelve Reserve Banks.

Federal Reserve Banks: A Federal Reserve Bank is a regional bank of the Federal Reserve System and is the central banking system of the United States. It works with the board for the supervision of the commercial banks and implementation of the policy.

Federal Open Market Committee: It is called as the Fed's chief body for monetary policy as it oversees the open market operations.

2) Decentralized Federal Reserve was due to the panic of 1907, the Aldrich-Vreeland Act of 1908 was passed. During the crisis there was a need for emergency issue of currency and also an establishment of a national Monetary Commission to determine for a long-term solution to the country’s banking and financial problems. Thus US establish decentralized Federal Reserve to balance the competing concerns of private banks and populist sentiment.

3) The New York district includes the largest banks in the nation. The New York Fed examines as well as supervises these banks to insure their safety and soundness of the country's financial system. It conducts open market operations and foreign exchange transactions for the Treasury and Fed. It also belongs to the Bank for International Settlements, thus president and the chairman of the Board of Governors who represent America at the monthly meetings of the global central banks. The president of New York Federal reserve is the only president of a regional Fed who is a permanent voting member for FOMC.

4) FOMC, also termed as Federal Open Market Committee, is the Federal Reserve Board branch that determines the monetary policy direction, specifically by directing the open market operations. The composition of FOMC includes the board of governors, which consists of the 7 members, and 5 Federal Reserve Bank presidents. It's main function is the formulation of a policy designed to establish the stable prices and economic growth.