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The Federal Reserve - Essay Example

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The Federal Reserve Introduction The Federal Reserve is one of the chief operators of the United States financial system. Even as its function is of primary importance, most American's are less familiar with the Federal Reserve than any of the major government entities…
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The Federal Reserve
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"The Federal Reserve"

Download file to see previous pages History, Structure, and Function The Federal Reserve was created in 1913 by Woodrow Wilson (Wells 2010). In the late 19th and early 20th centuries credit was controlled entirely by private banks. Farmers in the mid-western regions grew increasingly upset by this fact, as they complained that oftentimes the banks would alter their credit options at times when the farmers were vulnerable. The Federal Reserve was created as a compromise, with the banks still controlling credit, but the government determining the supply of funds (Wells 2010). While the intervening years have seen significant reforms in the way the Federal Reserve operates, its underlining function has remained the same. Private banks are able to borrow from the reserve at a discounted rate, they then loan this money to borrowers at the federal funds rate, or interest rate. As the Federal Reserve raises rates, so must the banks raise the rates of loans. This system is designed to ensure fair and equitable lending throughout the country. The current chairman of the Federal Reserve, who was recently reappointed in January of 2010, and Alan Greenspan and Paul Volcker preceded him (Johnson, Web). Federal Open Markets Committee (FOMC) The Federal Open Markets Committee is a branch of the Federal Reserve that has the responsibility of regulating the United States’ open market operations. While there are a great variety of committees and functions with the Federal Reserve, this committee perhaps is the most notable as it functions to make essential decisions about interest rates and the general growth of the supply of money within the country (Chandler 1971). These are factors that directly and significantly affect major aspects of the nation’s economy. In these regards, the FOMC is the primary monetary branch of the Unites States. The committee functions in a variety of complex, but well structured ways. In these regards, the committee meets and sets short-term objectives for long-term objects within a long-term structure of economic understanding. The short-term objectives work to ensure that the federal funds rate remains constant. In addition to regulating the federal funds rate, the Federal Open Markets Committee oversees operations that the Federal Reserve has overtaken abroad. They accomplish this task in close collaboration with the United States Treasury department. In terms of meeting structure, the FOMC is required by law to meet at least four-times per year, but generally they convene eight times annually (Chandler 1971). During the meetings, open reports are presented by committee members. The committee then works toward reaching a consensus in regards to policy decisions. During this entire process the Manager of the System Open Market Account oversees the policy presentations. What I Learned & My Point of View In research the Federal Reserve there was a great amount of structural and historical information I gained, but perhaps the greatest insights I gained were in regards to how the Federal Reserve functioned during the recent economic recession. When the recession hit the Federal Reserve began the process of lowering interests rates to increase consumer spending. At this point, the Fed has virtually lowered the interest rate to 0%. In addition to ...Download file to see next pagesRead More
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