The Role of the Federal Reserve

What Is the Federal Reserve System (FRS)?

The Federal Reserve System also known as “the Fed”, is the central bank of the United States. It was created in 1913 by congress to promote a strong and stable economy. The Fed has a number of important functions, including setting monetary policy, regulating banks, and providing financial services to the U.S. government. It is a unique institution, as it is not fully public or fully private, but rather operates as an independent government agency. The Fed has a board of seven members and 12 Federal Reserve banks, each operating as a separate district with their own presidents.

There is a common misconception that the Federal Reserve System is privately owned. In fact, it combines public and private characteristics: The central governing board of the FRS is an agency of the federal government and reports to Congress. The Federal Reserve Banks that it oversees are set up like private corporations.

Understanding the Federal Reserve System (FRS)

A central bank is a financial organization that has been granted exclusive authority over the creation and disbursement of credit and money for a country, union, or consortium of nations. The central bank is often in charge of setting monetary policy and overseeing member banks in contemporary economies. The twelve regional Federal Reserve Banks that make up the Fed are each in charge of a particular region of the United States.

President Woodrow Wilson signed the Federal Reserve Act on December 23, 1913, in reaction to the financial panic of 1907, which led to the creation of the Fed. The United States was the only significant financial power without a central bank prior to that. The U.S. economy saw multiple financial panics throughout the preceding century, which resulted in significant economic disruptions from bank failures and corporate bankruptcies. These panics were the catalyst for its formation. An institution to control panics and disturbances was called for after a crisis in 1907.

The Federal Reserve System's main bank regulator, the Fed, has extensive authority to take action to maintain financial stability. Additionally, it acts as members' last-resort lender.

The system's 12 regional Federal Banks are based in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

The Federal Reserve System's Mandate and Duties

The Fed has two key mandate: to promote maximum employment and to keep prices stable. The Fed achieve these mandate by setting interest rates and influencing the supply of money in the economy.

The Federal Reserve System duties can be further categorized into four general areas:

Managing credit and monetary conditions in the US economy to maintain maximum employment, stable prices, and moderate long-term interest rates is known as conducting national monetary policy.
Overseeing and controlling banking institutions to safeguard the credit rights of customers and the security of the American banking and financial system.
Keeping systemic risk under control and the financial system stable.
Offering financial services, which include a crucial part in running depository banks, the federal government of the United States, and international governmental institutions.

The Federal Reserve System's Organizational Structure

The Board of Governors is composed of seven people. The U.S. Senate must ratify the President's nomination of these people. A governor may hold office for a maximum of 14 years. The two-year staggered appointment process is meant to reduce the potential political impact that could arise from changes in appointment control between election cycles between political parties. Appointments must also, according to the law, reflect all significant areas of the American economy.

Although there might occasionally be a vacancy on the board, as of October 2023, every position is taken.

The Federal Reserve System's Independence

The subject of whether or not the people in charge of monetary policy should be totally cut off from the political system is known as central bank independence. The proponents of independence understand the power of politics to advance monetary policies that may benefit reelection in the short run but have long-term negative effects on the economy. Critics assert that strict policy coordination between the government and central banks is necessary, and that central banks should be subject to regulatory monitoring.

The fact that the president or any other government official is not required to ratify the Fed's judgments adds to its independence. It must, however, operate under the parameters of the governments monetary and fiscal policy goals and is still subject to congressional review.

Role of the Federal Reserve

The central bank of the United States is the Federal Reserve. This structure, which serves as the US central bank, is essential to three different ways. These include developing monetary policy, overseeing bank operations, and maintaining a stable and efficient payment system. Furthermore, this system:

Controls inflation;
Preserves financial stability; and
Offers financial services.

However, the Federal Reserve's primary responsibility is to carry out monetary policy. Transactions involving US government assets are what define this position in terms of influencing money supply growth and short-term interest rates. "Whoever controls the volume of money in any country is absolute master of all industry and commerce," is a quotation by James A. Garfield that highlights the functions of the Federal Reserve.

Managing Inflation

First and foremost, inflation makes money less valuable. Furthermore, inflation lowers purchasing power and the amount of money that may be used for business. Customers stock up on things that are unlikely to lose value as a result. Over time, demand for some products declines. Additionally, inflation raises the price of goods and lessens market competition. Overall, this state of affairs in the market has some detrimental effects. The Federal Reserve then uses interest rate manipulation to manage inflation. The Federal Reserve raises interest rates in an effort to slow the economy and lower inflation when it is abnormally high. As a result, when inflation declines, the Fed lowers interest rates to stimulate the economy and raise inflation. Medium amounts of inflation are required, and if fluctuate, the Federal Reserve serves to maintain it.

Conclusion

The Federal Reserve essentially controls all of the money in our economy, adding to or removing from circulation at any given moment. Ask yourself, "Has the Fed added enough money to the economy so that a company can afford to hire me?" if you ever have problems getting employment in the future.

In addition, the Fed has the power to moderate long-term interest rates and stable national prices. To put it another way, the "Fed" has substantial sway over the course of the economy.