Monetary policies in USA

Few days ago i attended a lecture about monetary policy in USA. Although it doesn't have any relation with India, but to know about world's greatest economy is somehow relevant..
Lecture was by Kishore ji Kulkarni...

So let us discuss what is the importance of monetary policies be it in US or India.
Monetary policy is the process by which the central bank, or monetary authority manages the money supply.
It is must to have a proper system. A e.g. for bad management is Brazil when authority increased money supply by 800% and there was 60% inflation every month. Imagine buying same product next day at higher and higher price.

A Proper System is required, in India its Reserve Bank of India (RBI) and in US its FRS Federal Reserve System Started in 1913.

Federal Reserve System(FRS) has three main components:
1. Board of Governor (BOG)
2.Federal Open Market Committee (FOMC)
3.Federal Banks

1. Board of Governor (BOG)
It has 7 governors appointed by US president with 14 years non-renewal tenure. They are selected in such a way that every 2 years one goes out and one comes in. So president of US mostly get right to select 2 governors in his tenure. That is why govt. doesn't play a big role in monetary policies of US.
Out of these 7, one is selected as Chairman, and he is considered most powerful person in this world because he can affect the money supply of Dollar. Chairman is selected for 4 years (renewable). Current Chairman is Ben S. Bernanke appointed till January 31,2010.

Decisions of BOG
1.Value of LRR (Legal Requirement Ratio). It is somewhat similar to CRR (Cash Reserve Ratio). It is amount which banks which they have to keep as reserve. This ratio is rarely change.
(like in case of emergency)
2.Serve in FOMC


2.Federal Open Market Committee (FOMC)
It has 12 members (7 governors). Rest 5 are from Federal Reserve Bank. One is from NY Federal Bank. Rest are from remaining 11 Federal banks. NY is permanent member as it has 40% share in Federal Reserve System.

Basic Functions of FOMC:
1.Open Market Operations- Buying and selling of Treasury bonds
2.Change in Discount Rate- IT is Rate at which federal banks lend money to commercial bankers. Up to 1991 it was rare to change it. Last year it was record 6 times (now common 4 to 5 times). Currently it is 6.25%(PLR). As it is Quite low it is provided after strict verification
3.Emergency-change LRR (last in 1979)


3. Federal Banks
There are total 12 Federal banks. Federal banks:

1. Boston
2. New York-Main Federal Bank
3. Philadelphia
4. Cleveland
5. Richmond
6. Atlanta
7. Chicago
8. St. Louis
9. Minneapolis
10. Kansas City
11. Dallas
12. San Francisco.

In an all we may say that " US plays no role in monetary policies formation" is a myth:

Because US govt. has decided that pay of chairman of board of Governor cannot be more then President of US ( $4,50,000). So most of the times these Governor because of their intellectual level get offers from Investment banks with much higher pay.

So most of the times president have to select more then 2 members. In fact last time when this happened that President selected only 2 Governor was in 1963 under John F. Kennedy. So we can say that govt. do play role in monetary policy as well.