The Federal Reserve Essay

1021 words - 5 pages

The Federal Reserve
David Shifflet
ECO 561
December 2, 2013
Ted Nordin

The Federal Reserve
The Federal Reserve System, which some refer to as the Fed, will celebrate its 100th birthday just before Christmas this year. It was created by the Congress of the United States to provide the nation with a safer, more stable currency and economy. The Fed’s responsibilities have been further defined to include:
* Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
* Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's ...view middle of the document...

* Interest on Required Reserve Balances and Excess Balances – Banks pay interest on balances maintained to satisfy reserve balance requirements and on excess balances – Requiring banks to maintain reserve balances acted like a tax on that amount of money because the bank was unable to invest the money in other ways. Paying interest on these balances counteracts that loss.
* Term Asset-Backed Securities Loan Facility – A funding facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by loans of various types to consumers and businesses of all sizes – This provides banks with money to lend to consumers and small businesses without collateral so long as the borrower has a good credit rating. This is a direct market stimulus.
* Term Deposit Facility – Facilitate the implementation of monetary policy by providing a new tool by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions – Gives the Fed a direct method to remove money from the market.
(Board of Governors of the Federal Reserve System, 2013)
During the financial crisis that started in 2008, the Fed used several short term tools to further stabilize the failing US market. These included the following:
* Money Market Investor Funding Facility – Designed to provide liquidity to U.S. money market investors – Provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors.
* ABCP MMMF Liquidity Facility – A lending facility that provided funding to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds under certain conditions – Intended to assist money funds that held such paper in meeting demands for redemptions by investors and to foster liquidity in the ABCP market and money markets more generally.
* Commercial Paper Funding Facility – To provide a liquidity backstop to U.S. issuers of commercial paper – Intended to...

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