Kavan Choksi Talks About the Composition of The Fed

The Federal Reserve Bank or the Fed is the central bank of the United States. It performs multiple important functions. These functions include establishing monetary policies, supervising and regulating bank operations, as well as maintaining an effective, dependable payment system. As per Kavan Choksi, buying and selling of U.S. government securities is the most important tool the Fed has to conduct monetary policy. This is often referred to as open market operations. A Federal Open Market Committee is responsible for administering the purchase and sale of U.S. government securities on the open market for the purpose of influencing short-term interest rates and growth of money and credit.

Kavan Choksi provides insight into the composition of the Federal Reserve or the Fed

The Federal Reserve or the Fed initiates a range of moves and countermoves that set into motion a fluid series of events. These are aimed at either expanding economic activity to stimulate an inactive economy or to correct hyperactive economic conditions that may end in a crash. The Fed makes use of a number of tools that enable it to fulfil its dual mandate. FOMC [Federal Open Market Committee] meetings are one of these tools, where voting members typically gather to determine the target for a key interest rate, also known as the federal funds rate. The federal funds rate implies to the interest rates that banks and other financial institutions charge each other for loans in the overnight borrowing market. It, in turn, becomes the rate at which several consumer loans and savings rates tend to be determined. These interest rates can have a major impact on every asset class, based on the speed and magnitude of the rate movements.

The FOMC is just one part of the Federal Reserve, which also features a Board of Governors and 12 reserve banks. The structure of the Fed includes

• The Federal Reserve Board: The Reserve Board comprises of seven members who are nominated by the president and confirmed by the Senate. This board convenes in Washington, D.C and its job is to guide the Fed and focus on fulfilling its important functions, including:

• Collecting and reporting on economic information
• Holding reserve monies for commercial banks
• Providing banking and payment services like wire transfers, check processing and currency distribution
• Making financial resources available
• Providing regional distinctions as per the local needs, customs, and economics

• Federal Reserve Banks: The Reserve Banks in the US operate in their distinctive geographic area. There are 12 Federal Reserve Banks with 24 branches, and each of them collects information on the economic state of diverse communities within its jurisdiction. The information and recommendations of the bank are taken into account in the decision-making processes of the Board of Governors and FOMC.
• The Federal Open Market Committee (FOMC): The FOMC is made up of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining 11 reserve bank presidents. This committee presides over open market operations impacting the federal fund rate.

As Kavan Choksi mentions, it is the FOMC that determines the key interest rate and has the authority to change the discount rate, sell securities, as well as redefine the reserve requirements.