The Federal Reserve is the central bank of the United States; formally called the Federal Reserve. It is a very important part of the country’s economic stability and health. Now, imagine this as the organization that oversees that money circulates and goes where it needs to go, that banks are secure, and that the prices do not skyrocket or deflate. The Fed is also one of the key players that determine the foreign exchange rates of the U.S. dollar that forms the forex markets and therefore, the value of world currencies.

Structure of the Federal Reserve

The Federal Reserve has three main parts: the Board of Governors, Regional Federal Reserve Banks, and the Federal Open Market Committee (FOMC).

• The Board of Governors is composed of seven individuals, whom the President of the United States elects, while the senators confirm. These are located in Washington, D. C. as they are responsible for determining broad strategies to be followed by the Fed.
• Prominent throughout 12 sections of the U. S, The Regional Federal Reserve Banks are vigilantly responsible for supervising and regulating local banks within their locale as well as serving their needs. These banks also gather information on the state of the economy of their region which assists in decision making.
• FOMC is a group in the Fed, which gathers at fixed time and decides on the course of the U. S. economy. The FOMC is important because it is the one that determines all the polices that control interest rates which in turn affects everything from the mortgage rates to the value of the Greenbacks.

Main Functions of the Federal Reserve

The Federal Reserve has four main functions:

1. Monetary Policy: This is about the availability of money and the manipulation of the rates of interest. It seeks to minimize inflation rate at the same time boost the rate of growth in the economy.
2. Regulation of Banks: The Fed monitors how various banks are running to ensure that they are running with an appropriate capital base. This assists in avoiding bad risks in banking that lead to the closure of banks and would be detrimental to the economy.
3. Financial Stability: To achieve this the Fed holds a central authority over the entire financial system applying various actions. But in certain circumstances such as credit crunch for instance in the year 2008 then the Fed comes in to support the system.
4. Services to the U. S. Government and Financial Institutions: Some of these functions include being the bank to the government of the United States of America, clearing cheques, and issuing coins to some other banks.

Monetary Policy Tools

The Federal Reserve uses a few key tools to influence the economy:

• Interest Rates (Federal Funds Rate): The Fed works the short-run rate of interest using the main price which is the Federal Finances Rate. When the Fed increases this rate, the cost of borrowing money is also high and this normally has an effect of paring down the economy. Reducing the rate makes borrowing cheaper for the actors in the economy hence improving the demand for products leading to enhanced economic activity.
• Open Market Operations: The Fed also Bai and sells U.S. government securities in the open market Commonly known as open market operations. When the Fed purchases securities, it injects money into circulation and this tends to depress the interest rates. On the other hand, selling securities withdraws funds from the economy, and increases the rates.
• Reserve Requirements: This means pre-set reserve ratios which are the percentage of the deposit that Commercial banks are supposed to retain and are not allowed to lend out. Alteration of this, therefore, enables the Fed to decide on the amount of money that is available to the banking institutions to lend out.
• Discount Rate: This is the interest rate that the Fed uses to lend money to banks who in turn borrow directly from the Federal Reserve. A lower discount rate pleads for more borrowing by the banks hence easing the cash in circulation in the economy.

Impact of the Federal Reserve on the Forex Market

One other significant actor in the forex market includes the Federal Reserve of the United States as it sets the value of the U. S. Dollar. For instance: When the Fed increases the interest rate this tends to encourage foreign investors to invest more in the US hence making the value of the dollar rise. In other contexts, if the Fed opts to reduce the rates which are the cost of funds, the value of the dollar may be eroded for several reasons. This makes Fed decisions of import to the traders who deal specifically in the buying and selling of currencies in the global Foreign exchange commerce.

The other reason is that the Fed influences the global economies because most countries either import or export from the U. S or hold the U. S dollars as their money reserves. Thus, every time the Fed decides on something, it can create a chain effect on other people’s economies besides their currencies.