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The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.
The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States.
The monetary policy of the United States is the set of policies which the Federal Reserve follows to achieve its twin objectives of high employment and stable inflation.
Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability. Further purposes of a monetary policy may be to contribute to economic stability or to maintain predictable exchange rates with other currencies. Today most central banks in developed countries conduct their monetary policy within an inflation targeting framework, whereas the monetary policies of most developing countries' central banks target some kind of a fixed exchange rate system. A third monetary policy strategy, targeting the money supply, was widely followed during the 1980s, but has diminished in popularity since then, though it is still the official strategy in a number of emerging economies.
The Federal Open Market Committee (FOMC) is a committee within the Federal Reserve System that is charged under United States law with overseeing the nation's open market operations. This Federal Reserve committee makes key decisions about interest rates and the growth of the United States money supply. Under the terms of the original Federal Reserve Act, each of the Federal Reserve banks was authorized to buy and sell in the open market bonds and short term obligations of the United States Government, bank acceptances, cable transfers, and bills of exchange. Hence, the reserve banks were at times bidding against each other in the open market. In 1922, an informal committee was established to execute purchases and sales. The Banking Act of 1933 formed an official FOMC.
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In the United States, the federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances are amounts held at the Federal Reserve. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets and central to the conduct of monetary policy in the United States as it influences a wide range of market interest rates.
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Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary policy that came into wide application after the 2007–2008 financial crisis. It is used to mitigate an economic recession when inflation is very low or negative, making standard monetary policy ineffective. Quantitative tightening (QT) does the opposite, where for monetary policy reasons, a central bank sells off some portion of its holdings of government bonds or other financial assets.
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Negative interest on excess reserves is an instrument of unconventional monetary policy applied by central banks to encourage lending by making it costly for commercial banks to hold their excess reserves at central banks so they will lend more readily to the private sector. Such a policy is usually a response to very slow economic growth, deflation, and deleveraging.
The 1994 bond market crisis, or Great Bond Massacre, was a sudden drop in bond market prices across the developed world. It began in Japan and the United States (US), and spread through the rest of the world. After the recession of the early 1990s, historically low interest rates in many industrialized nations preceded an unexpectedly volatile year for bond investors, including those that held on to mortgage debts. Over 1994, a rise in rates, along with the relatively quick spread of bond market volatility across international borders, resulted in a mass sell-off of bonds and debt funds as yields rose beyond expectations. This was especially the case for instruments with comparatively longer maturities attached. Some financial observers argued that the plummet in bond prices was triggered by the Federal Reserve's decision to raise rates by 25 basis points in February, in a move to counter inflation. At about $1.5 trillion in lost market value across the globe, the crash has been described as the worst financial event for bond investors since 1927.
Marvin Seth Goodfriend was an American economist. He held the Allan H. Meltzer Professorship in economics at Carnegie Mellon University; he was previously the director of research at the Federal Reserve Bank of Richmond. Following his 2017 nomination to the Federal Reserve Board of Governors, the White House decided to forgo renominating Goodfriend at the beginning of the new term.
References
- 1 2 "The Fed - FAQs".
- ↑ Jeffrey R. Campbell; Charles Evans; Jonas D. M. Fisher; Alejandro Justiniano (2012). "Macroeconomic Effects of Federal Reserve Forward Guidance". Brookings Papers on Economic Activity. 43 (1 (Spring)): 1–80.
- ↑ "BoE's Carney unleashes Delphic forward guidance? @Euromoney". Euromoney. 6 August 2013.
- 1 2 David O. Lucca; Emanuel Moench (September 2011). "The Pre-FOMC Announcement Drift" (PDF). Federal Reserve Bank of New York Staff Reports, no. 512.
This article incorporates text from this source, which is in the public domain . - ↑ L Nilsson (August 2015). "The Curious Case of the Pre-FOMC Drift". SSRN 2640477.
