Effectiveness of the US Federal Reserve - Essay Example

Those initiatives should arrive at good results for the greater majority, including Small Business Enterprises and private individuals, although there seems to be a need to determine the timetable for such an achievement. As of May 2013, only large businesses were discovered to be realizing better credit facilities. The employment rate remains high although previous quarters had higher unemployment rates. However, the most recent initiatives reported in February 2013 by the Board of Governors gave some hope for changes in a better direction.

In that report, full employment was made a commitment. And until the time when full employment is realized while the low inflation rate at 2% is maintained, the Fed will continue to accommodate a further infusion of money supply into the economy. Roles & Effectiveness of the US Federal Reserve Founded in 1913, the US Federal Reserve System was meant to serve as the country’s Central Bank under the supervision of Congress. Its roles were: (1) to formulate the monetary policy that defines the nation’s “monetary and credit conditions” so that maximum employment of the people, price stability, and “moderate, long-term interest rates” can be realized; (2) to supervise and regulate banks and other financial institutions for a safe and sound financial system that protects “the credit rights of consumers”; (3) to maintain a stable financial system and control the risks inherent in the financial markets; and (4) to serve the local and foreign governments with the facilitations for transactions, including services in connection with the payment system (BoG 2005, p.1). Over the years, it has evolved into influencing the demand and money supply situation of a country, using the four (4) standard means.

The first is known as the means through “Open Market Operations” whereby the Federal Bank may reduce or increase the money supply by limiting the amount and/or volume of purchases or sales of US Treasury securities. When the Federal Bank purchases securities from the open market, more cash is made available in the economy. When the Fed sells Treasury securities to cash-rich investors for them to have a stable income source at an attractive interest rate, the country will have less money supply circulating.

A 2nd means would be through the issuance of a directive for all banks to maintain a certain reserve requirement. These are in the form of cash in amounts determined by the percentage of deposits by consumers. Reserves are then deposited with the Federal Reserve Bank. To increase the money supply, the Fed can simply lower the required reserves for all deposits. To decrease the level of money supply, reserve requirements may be increased so that there would be fewer lending operations on the part of banks and therefore lower money supply available in the economy.

The 3rd way is by adding the requirement to have reserves in the form of “Contractual Clearing Balance” (BoG 2005, p. 3). Some transactions with payments that take some time to clear between two banks can be secured by additional reserves at the Federal Bank. Such amounts are on top of the 2nd means which is the reserve requirements by the Fed. These additional deposits with the Federal Bank may be stipulated by the Federal Reserve Bank (FRB) governing body.