Monetary Policy Tools
Federal Reserve System which is also called “The Fed” is the central bank of the United States (US) and is considered to the world’s most powerful financial institution. Fed was established after the US economy was repeatedly hit by financial panics and severe economic disruptions. Fed is the main regulator for the financial institutions of the country that holds the power to ensure the financial stability in the system (CHEN, 2020).
The major purpose behind founding Fed is to provide the country with a monetary and financial system that is safe, flexible, and stable. Some of the responsibilities of the Fed are as follows:
- Managing Money supply and credit in the economy.
- Regulation and Supervision of financial institutions for maintaining stability.
- Through various depository institutions (banks, credit unions, etc.) it provides payment services to the public.
Federal Reserve uses monetary policy as a toolkit to control the money supply in the economy, to achieve sustained and high growth rates as well as to maintain low inflation rates. Depending on the assessments made by the policy-makers, the effectiveness of monetary policy can be analyzed. Monetary policies can either be Contractionary or Expansionary depending upon the money supply requirement in the economy.