Federal Reserve System - Essay Example

Federal Reserve System The Federal Reserve System is the United s of Americas central banking system. This banking system is similar to governmental banking system, with a board of governors, a Federal Open Market Committee, twelve regional Federal Reserve Banks, and many private banks which own stock in one of the regional Federal Reserve Banks. This paper will examine the Federal Reserve Systems main points and objectives. The Federal Reserve was created in 1913 to provide a stable banking system for America. The purposes of the Federal Reserve today include: conducting the nations monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices supervising and regulating banking institutions to ensure the safety and soundness of the nations banking and financial system and to protect the credit rights of consumers maintaining the stability of the financial system and containing systemic risk that may arise in financial markets providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nations payments systems. (Simpson, et al., 1) Basically the Federal Reserve protects Americans in monetarily matters. The Federal Reserve System is made up of twelve regional banks located in San Francisco, Dallas, Kansas City, Minneapolis, Chicago, St. Louis, Atlanta, Cleveland, Richmond, Philadelphia, New York, and Boston. Private banks own stock in the twelve regional banks, this is what funds the twelve Federal Reserve Regional banks. The twelve regional banks are made up of regions listed below: (Simpson, et al, 8) The private Federal Reserve banks own the Federal Reserve Regional banks in their regions. Another component of the Federal Reserve System is the Federal Reserve Board of Governors. The Federal Reserve Board of Governors is appointed by the President of the United States of America, but confirmed by the Senate. The seven member board serves can only serve a maximum of fourteen years, with a member serving one term at time of two years. The only exception is the Chairman of the Board and the Vice Chairman, who serve four year terms. However, the fourteen year limit also applies to them. The only way a board member can be removed is by the president for cause. The current board members are Ben S. Benmanke, Chairman, Donald L. Kohn, Vice Chairman, Susan Schmidt Bies, Kevin M. Warsh, Randall S. Krosnzer, and Frederic S. Mishkin (The Federal Reserve Board). This Board of Governors is an independent governmental agency. They oversee the twelve regional banks, plus the numerous private banks owning stock in the regional reserve banks. The Federal Open Market Committee (FOMC) is a committee made up of the Federal Reserve Bank of New York, the Federal Reserve Board of Governors, plus four other Federal Reserve Regional Bank presidents that serve on a alternate schedule. This committee reviews the open market. The open market being the buying and selling of government securities. This way the committee can determine monetary and credit conditions. The FOMC also oversees the foreign currency exchange rate. The FOMC is extremely important part of the Federal Reserve System, because of its stabilizing functions over the monetary and credit conditions. The monetary supply is controlled by the Federal Reserve System by several factors. A few definitions must be examined before discussing the control of the monetary supply. The following components of reserve requirements, open market operations, and discount rate are defined for this discussion as: 1. Manipulating the legally required reserve ratios ("reserve requirements") for banks (and, less directly, for some other depository institutions, such as savings and loans and credit unions) 2. Buying or selling U.S. Government debt instruments (Treasury bonds, notes and bills on the private financial markets in New York (“open market operations”) 3. Selling the interest rate at which the Fed stands ready to make short-term loans to member banks and other depository institutions that would otherwise fall below the required reserve ratios (the Feds “discount rate”) (Simpson, et al., 107-128) The open market in America is dealt through the Open Market Desk at the Federal Reserve bank in New York. The Open Market Desk has two tools to control the money supply. The first is repurchase agreements. Repurchase agreements are short termed lending by the Federal Reserve Regional banks to the numerous federal reserve banks privately owned. The Federal Reserve Regional bank deposits money in a primary dealers reserve account, receiving in return promised securities as collateral. The Federal Reserve Regional bank then charges the primary dealers reserve account for accrued interest and the principal. Terms can vary on the amount of time, depending on the individual transaction. By lending this money, the Federal Reserve Regional banks increase the money supply. On the other hand, the Federal Reserve Regional banks can borrow money from their primary dealers. This decreases money supply. The second tool for controlling money supply is outright transactions. This is where the Federal Reserve Regional banks outright buys Treasury securities, by depositing newly formed or freshly printed money in the primary dealers account. The drawback to this tool is the increase of money supply is permanent. This must be done carefully. If new money floods the market, the dollar value could decrease. Although the principal growth is enduring, the yield of maturity on the security is still charged. Another way of outright transactions is the outright sell of treasuries. This decreases money supply. The money pays for securities from primary dealers, removing it from their reserve accounts. This is the money creation process backwards. This outright transaction does not often occur. Without the Federal Reserve System, banks would fall into the chaotic mess of the nineteenth century. No regulation would protect the monies in banks. This could force America into financial ruin. Although some critics do not like the Federal Reserve System, it is the best system available today. Like democracy, the Federal Reserve Systems check and balance configuration helps preserve the American way. References The Federal Reserve Board. 2006. Federal Reserve, 30 Dec.2006 http://www.federalreserve.gov/bios/ Simpson, Thomas D. et al. The Federal Reserve System. Purposes and Functions. Washington: System Publication, 2005. Read More