The Federal Reserve Board - Essay Example

The Fed: Who, What, When, Where, Why The Federal Reserve Board, commonly called the Fed, is the federal banking system, its governors, and its regulatory mechanisms. It has a board of governors known as the Federal Reserve Board, regional banks, and smaller banks that own shares in the federal system. The Fed is responsible for regulating the economy through the control of the money supply. They are also charged with the oversight of the banking industry to insure compliance by the participants.

They also act as the servicer for several other banking institutions. One of the primary functions of the Fed is to stabilize the economy. There is some debate about when the Fed should act as a stabilizing force and when it should act as an energizer or cooling factor. However, generally the Fed tries to maintain a stable growth rate, low inflation, and optimize the unemployment rate. Controlling the money supply and the interest rate regulates these factors. By lowering the interest rate, money is easier to borrow and the economy picks up steam.

However, this may also create inflation. By raising interest rates, the money supply contracts and inflation falls. At a recent meeting, the Fed left the interest rate alone saying they were more concerned about inflation than a weak economy (Fed Leaves). However, with falling inflation there is a risk of rising unemployment. The Fed carefully balances these variables to keep the economy on an even keel. The Fed can also increase the money supply by increasing the reserves held by banks that loans are drawn against.

This will make more money available. By reducing the reserves, it tightens the money supply. They also regulate the currency supply that has a minimal effect on the economy. The Federal Reserve Board is headed by the Federal Reserve Chairman, currently Ben Bernanke. The Chairman has considerable influence on the direction of the board and the economy. Their individual philosophies on inflation and the best ways to control the economy can have a great effect on the working class. Even their outlook on the economy can move the stock market by several percentage points.

The previous Chairman, Alan Greenspan, warned about a possible recession on Feb. 26 and the market fell. The current Chairman Bernanke was more upbeat and helped the market recover just a few days later (Hogan ). The Fed meets several times a year to adjust the interest rate. The Fed commented this week that, ".the economy seems likely to continue to expand at a moderate pace" (Felsenthal). They had the option of lowering the rate, which some were speculating on, but they feared it would cause inflation.

It's these types of decisions that make the Fed one of the most powerful economic bodies in the world. Differences in opinion on inflation, tax cuts, and unemployment can stimulate or retard economic activity. Investors pay close attention to the actions of the Fed and they look for the slightest clues in the words of the chairman for signs of economic health. Works Cited "Fed Leaves Interest Rates Unchanged for 6th Time." New York Times 21 Mar. 2007. Felsenthal, Mark. "UPDATE 2-Fed Holds US Rates Steady, Leaves Options Open.

" Rueters 21 Mar. 2007. Hogan, Marc . "Greenspan vs. Bernanke: Hold Your Bets." BusinessWeek Online 1 Mar. 2007.