The Federal Reserve, or the central bank, is among the most powerful economic institution in the United States of America. The Federal Reserve was given the power over regulation of the value of money by congress…
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The Federal Reserve, or the central bank, is among the most powerful economic institution in the United States of America. The Federal Reserve was given the power over regulation of the value of money by congress. In simple terms, the Federal Reserve came into being by enactment of the Congress. Consequently, the Congress has the obligation of overseeing the monetary policy and the Federal Reserve. This paper analyzes the importance of the Federal Reserve and strategy in stabilizing the economy of the country. The Fed System consists of a board of Directors, 12 regional bank branches in major US cities, and the Federal Open Market Committee (FOMC), the decision making unit of the Fed (Wells 19). The functions of the Fed are vital to the economy of the US as they play a major role in management aggregate demand, total spending, and most importantly, inflation. In the management of aggregate demand, the Fed applies relatively accurate counter-cyclical monetary policy to manage economic activities or aggregate demand. This translates to the essence of monetary policy in the business cycle; the recessions and booms are direct effects of monetary policy set in place. Ultimately, the stability economic activities depend on the stability of the monetary policies. The monetary policy upheld by the Fed also determines the inflation rate in the country. The government at times uses inflation to increase tax revenues thus reducing its debts. On the negative side, inflation disrupts the price system, thus affecting the free market economy. From these deductions, the lasting solution to inflation is stabilizing prices. This can be made one of the monetary policies of FOMC by the Congress. Another important role played by the Fed is that of being the lender of last resort. During crises, the Fed may increase the reserve or liquidity demand requirements thus automatically preventing liquidity shortages and stabilizing the economy. These liquidity reserves need to be adequate and available in economic crises. The Fed also influences the interest rates of major economic sector like automobiles, investments, and housing. The Fed, through its Federal open Market Committee (FOMC) unit, controls the economy of the nation through its monetary policy. Monetary policy is the strategy of either decreasing or increasing the supply of money to enhance a stable growth of the economy. The Fed, with the authority installed upon it in the Monetary Control Act of 1980, may influence the economy through its three main tools; reserve requirements, open market operation or interest rates (Wells 4). On the reserve requirement, the Fed may impose a reserve requirement ratio that is either lower or higher than the prevailing ratio, depending on the nature of the crisis. This rule applies to all the operational banks regardless of their membership to the Fed. An increase in the reserve ratio requirement decreases the supply of money in the economy, and vice versa. To understand this concept, let us assume that the Fed has imposed a 10% reserve requirement on banks. This translates to 10% of all deposits made. Some calculations translate to ten times the amount of money created, or in general, 1/R, where R is the reserve requirement ratio. Since the banks require only 10% of the amount deposited by their clients for reserve, the actual deposit equals 10% of the number of loans the bank can create. Therefore, the number of total loans a bank can create equals to the actual deposit divided by the reserve requirement. The reserve requirement ratio is very powerful tool, and has only been used twenty two times in a period of 40 years. Nevertheless, the reserve ratio has been maintained at 50% since 1974. The discount rate is also biased by the FOMC for stability of the economy. Discount window is an economical term that refers to the Feds when it lends out money to banks, and the interest rate is known as the discount rate (as the banks turned assets in exchange for cash). For
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The money supply which consists of the circulating currency and bank deposits needs to be controlled in order to balance the lending and borrowing capacity of the financial institutions. FED uses three tools to control the money supply: changing the reserve requirements, open market operations, and changing the discount rate (Tucker, 2010, pg.408).
FED plays an important role to maintain the US economy through different tools. It argued, that the FED was the most important global player in tackling the financial crisis. FED basically plays a role in providing largest payment system in the world. All the group of tools, used by FED from 2008 to 2012, are considered.
Over the years, the system and structure if the federal reserve has evolved to meet the effects of economic crisis and great depression in the economy. The Federal Reserve System was created under the Federal Reserve Act in order to address the issue of panic in the banking industry and acts as the final check point and regulator in the clearing system and the banking industry.
The structure, roles and the responsibilities of the Federal Reserve has undergone rapid changes over the years which have been mainly stimulated by the events like the Great Depression, Global Financial Crisis, etc. The structure of the Federal Reserve System is composed of a governing board, the open market committee, regional Federal Reserve banks, privately owned banks in US and the advisory councils.
The United States of America uses the monetary unit of a Dollar. The United States Treasury prints money bills for distribution to the banks in form of bank reserves. The banking system provides the platform for reserving money for distribution to the public.
Monetary policy is the actions taken by the central bank to influence the availability and cost of money and credit to assist in promoting national economic goals. The Fed's monetary policy decisions affect the flow of money and credit in the economy.
The Federal Reserve System includes the Federal Open Market Committee, the Board of Governors, and the Federal Reserve Bank Presidents.
its fear of centralized power before the twentieth century and it is also evident from the check and balances of Constitution and preservation of the rights of the state. This fear enhanced the resistance of Americans to establish a central bank in the state. The opposition of
Changes in major economic variables have a significant impact on the consumer spending. For example, higher interest rates increase the savings and affects consumer spending. According to Engels Laws, with