Federal Reserve System (the Fed)

Definition

The Federal Reserve System (the Fed) is the central banking system of the United States, responsible for implementing monetary policy and regulating financial institutions. It aims to promote maximum employment, stable prices, and moderate long-term interest rates.

5 Must Know Facts For Your Next Test

1. The Fed influences bond prices and yields through its monetary policy actions, such as setting the federal funds rate.
2. Quantitative easing by the Fed involves purchasing long-term securities to inject liquidity into the economy, which can affect bond valuations.
3. The Federal Open Market Committee (FOMC) within the Fed makes key decisions about interest rates and the growth of the U.S. money supply.
4. Open market operations conducted by the Fed involve buying or selling government bonds to influence short-term interest rates and money supply.
5. Changes in the federal funds rate set by the Fed can impact both short-term and long-term interest rates, affecting bond prices inversely.

Review Questions

• How does a change in the federal funds rate by the Fed affect bond prices?
• What role does quantitative easing play in bond valuation?
• What are open market operations and how do they influence bond markets?

Related terms

Federal Funds Rate:

The interest rate at which depository institutions lend reserve balances to other depository institutions overnight.

Quantitative Easing:

A non-traditional monetary policy used by central banks to stimulate the economy by purchasing long-term securities.

Open Market Operations:

Activities conducted by a central bank to buy or sell government bonds on the open market to regulate money supply and interest rates.