The Federal Reserve System is a system that controls the financial flow of the United States. It is the central bank of the United States and a third central system of banking in the history of The US. The US nation has however divided into twelve Federal Reserve districts with banks in each district. The Member commercial banks own the Federal Reserve since they are the majority of shareholders (Bernanke and Ben 6). Even though they are the majority shareholders, they do not have the powers to control the Federal Reserve because they do not vote. The Federal Opening Market Committee, in this case, is responsible for making the Federal Reserve decisions. US Treasury Department, the President or even the Congress do not ratify the decisions made by the Federal Reserve. Congress is responsible for the approval of selected members by the president. The chairperson of the Federal Reserve heads the Federal Reserve System and is appointed directly by the president (Bernanke and Ben 8). Jerome Powell is the current chairman of the Federal Reserve System. President Donald Trump nominated him in February 2018. It has its headquarters in Eccles Building, Washington DC. The reason for opening up these twelve banks was to assist the Federal Reserve to carry out its daily activities with ease.
On December 23, 1913, Congress decided to come up with an idea of creating the Federal Reserve after The Federal Reserve Act was signed into law by President Woodrow Wilson. After a series of financial panics and stresses with the 1907 financial panic being the most particular, there was a desire for central monetary system control (Hatzel, Robert and Gary 277). The reason for the desire to have a central system of monetary authority was to alleviate crises in the financial system.
The Federal Reserve System often referred to as ‘The Fed’ being the America’s central bank is a compelling and influential body not only to the American economy but also to the world’s economy. Many would consider it a ‘secret society’ that controls the money of the world because of its complexity. They are however right because the central banks are responsible for monetary supply management globally though it is not a secret. The knowledge of how the Fed works entirely depends on the understanding of its structure (Hatzel, Robert and Gary 277). It comprises of Board of Governors is a body that is responsible for directing the commercial laws. The Board of Governors consists of seven members who are accountable for discount rate setting as well as the reserve requirement for other banks. Staff economists document and provide each, and every analysis carried out to the Congress such as semi-annual reports of financial flow and monthly Beige Book. Another body known as the Federal Open Market Committee (FOMC) overlooks the operations of the open market. This overlooking includes coming with targets and setting them for the fund rates of the Federal Reserve System. These fund rates are the ones that guide the rates of interest. The Board of Governors, the Federal Reserve Bank of New York president together with the four bank presidents from the 11 banks, are members FOMC members. In a year, they conduct meetings eight times (Hatzel, Robert and Gary 277). Implementation of policy and supervision of commercial banks is realized through side by side cooperations of the Federal Reserve Banks and the board.
The Federal Reserve System in the present-day US has four responsibilities in maintaining the financial system stability as well as managing systemic inflation risks that may come about in the commercial market. Inflation destroys the growth benefits. It also has the responsibility of providing various services financially to the government of the United States together with financial institutions in the US. It plays a significant role in conducting operations in payment systems of the nation. The Federal Reserve is responsible for the supervision and regulation of banks as well as other financial institutions that are important to ensure soundness and safety of the economic and banking systems of the nation and protection of consumer rights (Hatzel, Robert and Gary 277). It conducts the monetary policy of the country through influencing cash together with credit conditions with the aim of achieving a stable economy. The leading of monetary policy by the Fed enables it to perform its functions (Bernanke and Ben 11). Health economic growth is the primary goal of monetary policy which is targeting a 2 to 3 percent growth rate in gross domestic product. The monetary policy also aims at ensuring maximum employment rates.
The Fed manages ably to control inflation through credit management which is the most significant money supply component. It moderates long interest rates –term utilizing operations of an open market as well as the fund rates of Fed. Fed lowers the interest rates hence making credit cheap when there is no inflation risk. Liquidity and the growth of business increase after that. The increase in cash and business growth reduces cases of unemployment. With the help of the core inflation rate which is measured by the Personal Consumption Expenditures Price Index, the Fed can monitor inflation (Wells and Donald 54). Fed puts in place the use of expansionary monetary policy when lowering the rates of interest. The lowering of interest rates expands liquidity and credit, making the economy to grow at a faster rate as well as the creation of new employment opportunities. Too much growth of the economy, on the other hand, may trigger inflation. When it comes to this point, the Fed applies the contractionary monetary policy and increases the rates of interest. An increase in the interest rates makes borrowing a bit expensive. Increased costs of loans retard growth and make the business likelihood slim and thus raising the prices. The Federal Reserve chairs are the major players in the anti-inflation fights and manage Fed’s rates of interest.
Fed states that the banks must at least hold 10 percent of their acquired deposits each night on their hand. For smaller banks, however, this percentage is much less. A bank borrows what it needs from other banks if it happens to lack cash on hand when a day ends. The money borrowed by the bank is called Fed funds (Wells and Donald 57). The FOMC sets the target for Fed funds rate at its meetings monthly. The Fed applies the use of open market operations to keep it closer to its target. The free market operations assist the Fed to buy and even sell securities from member banks belonging to it.
Fed oversees an estimation of about 5000 bank holding companies. It is composed of 850 state Federal Reserve Banking System members together with some foreign banks that are situated in the United StatesFed banking system consists of 12 Federal Reserve banks. The banks serve and also supervise commercial banks located in their regions. These 12 banks are in Kansas City, Boston, Cleveland, New York, Atlanta, Philadelphia, Chicago, Richmond, San Francisco, Minneapolis, Dallas and St Louis (Wells and Donald 58). These Reserve banks are of service to the US Treasury since they handle selling government securities, payments and also cash management. The close collaboration between the Federal Reserve and the treasury department aimed at preventing the global financial collapse in the 2008 financial crisis. Fed created many tools which include the Team Auction Facility, Quantitative Easing, and the Money Market Investor Funding to assist in economic stabilization.
The Federal government sells out Treasurys to the Fed. The process of selling out the Treasurys is called debt monetization. The Fed creates money that is used to purchase the Treasurys. It then adds that money to the system of the money supply. Fed has acquired $4 trillion in Treasurys over the past ten years. Fed is known as the ‘bankers’ bank’ because each reserve bank conducts currency storage and checks processes through it (Bernanke and Ben 23). Fed generates loans for its members so that they can meet their reserve requirement when the need arises. The discount window is the channel through which the loans generate. Many banks, however, avoid the discount window because of the attached stigma. There is an assumption that the bank is unable to acquire loans from other banks.
In my opinion, I believe that the Federal Reserve works. The reason is that it affects the stock of individuals as well as loan rates and mutual funds. This effect on the stocks and loan rates only show that it has a direct influence on the economy. This direct influence on the economy affects individuals economically and even in their home value. I, therefore, believe it works in stabilizing the economy of the United States and the world in general mainly in controlling inflation.
Bernanke, Ben S. “Federal reserve policy in an international context.” IMF Economic Review 65.1 (2017): 1-32.
Hetzel, Robert L., and Gary Richardson. “Banking and Monetary Policy in American Economic History from the Formation of the Federal Reserve.” The Oxford Handbooks of American Economic History 2 (2018): 277.
Wells, Donald R. The Federal Reserve System: McFarland, 2017: 54-60