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The Federal Reserve System was created to control lend balances of different financial institutions. This system deals with depositary system and institutions, which are closely connected with the demand for money, banking and the money supply, the stock market, interest and investment. The federal funds are one of the most important factors, formulating an effective financial system of the United States of America.
Firstly, the Federal Reserve is the central bank of the USA. In fact, it is a compound of public and private elements. The Federal Reserve System was created by the Federal Reserve Act in 1913. Operating of this fundamental structure began in 1914. This system consists of twelve regional reserve banks, a federal government agency, the Board of Governors in Washington, D.C., Advisory Councils, the Federal Open Market Committee (FOMC) and Advisory Councils.
Secondly, Board of Governors is the leading organ of the Federal System of the USA. It fulfills a lot of functions: regulation of the monetary policy actions, analyzing of domestic and international economic and financial situation. It is closely connected with the regional Reserve Banks. Board of Governors influences the demand for money, banking and the money supply with monetary policy actions. The Board solves questions of reserve requirements for depositary system and institutions and formulates analytical conclusions due to discount rates (Board of Governors). Twelve Reserve Banks and thirty eight member banks are charged with discount and interest rates. Changes in these rates may lead to changes in demand and inflation and aggregate supply. The Board of Governors maintains such function as control of reserve requirements. Reserve requirements are affected by monetary policy, as this is the amount of funds hold by depository institutions. Reserve requirements include transaction accounts and Eurocurrency liabilities (Board of Governors).
Thirdly, the Federal Open Market Committee (FOMC) is the Federal monetary policymaking body. This kind of policy is directed to make prices stable and to achieve economic growth. This organ is described by interdependence. It`s functions are related to employment rate and price stability. The FOMC has made the report of financial rates of 2012, where it indicates the rise of the inflation rate up to two percent. This Committee holds the policy of improvement in mortgage-backed securities. It provides reinvesting its principal payments of agency debt and improving of maturing. Such actions are eager to decrease pressure on discount rates, long- term rates and support-mortgage markets. The Federal funds rate of January 2013 is between 0 and 0, 25 percent.
Furthermore, the Federal Reserve uses the open market operations in order to formulate stable reserve balances and lends for depository institutions. Discount rate is put up by commercial banks on loans they get from regional Reserve Bank`s lending structure which is called the discount window. This rate closely influences credits for short-term market interest rates.
Reserve banks play one of the fundamental roles in the financial system. They offer deposits due to the Term Deposit Facility.
The question of the liquidity trap is one of the top questions of recent years. This kind of trap is described as zero short-term nominal interest. The supply and demand in the country is diminished in such a case as the population is trying to store up money, which can cause deflation. Many scientists mentioned that the period of 2008-2011 was a liquidity trap for the USA, but nowadays the financial problems are more connected with the process of inflation, but not deflation. People do not store up money in large amounts.
Overall, the Federal Reserve System is an effective control organ which provides credits and deposits for depository institutions and controls supply and demand for money, inflation, interest and investment.