The Role of the Federal Reserve

THE ROLE OF THE FEDERAL RESERVE 5

TheRole of the Federal Reserve

TheRole of the Federal Reserve

TheFederal Reserve System or the Federal Reserve is the central bank ofthe United States of America. The Federal Reserve provides a varietyof services to the U.S economy such as monitoring monetary policy,regulating and supervising banks and provides a list of financialservices such as selling and purchasing treasury bonds on behalf ofthe U.S government. The Federal Reserve System was created in 1913under the Federal Reserve Act. During this time, President WoodrowWilson was the President of the United States (iMinds, 2014). TheFederal Reserve System is comprised of a network of 12 FederalReserve Banks and has 25 branches. The Federal Reserve Banks haveheadquarters in the Cities where they are located and are also namedafter the city itself. These Federal Reserve Banks include: New York,Boston, Philadelphia, Richmond, Chicago, Atlanta, Cleveland, St.Louis, Kansas City, Minneapolis, San Francisco and Dallas. TheReserve Banks are also called a banker’s bank and it role is toserve the banks, the public and U.S Treasury. There are 8,039commercial banks in the U.S and 38% of them are member of the FederalReserve System. The Federal Reserve System is an independent entitythat works with the U.S government (iMinds, 2014). However, thegovernment does sometimes overstep its mandate in economic policy andinterferes with the role of the Federal Reserve System.

TheFederal Reserve System mandate is to provide a nation with aflexible, safe and stable monetary system. In fact it can be arguedthat the main responsibility of the Federal Bank can be narrowed downto two roles. The first is influencing the supply of money in theeconomy. This can be altered through pumping more money when theeconomy slows down or cutting down on the supply of money when theeconomy is growing too fast. Secondly, the Federal Reserve can alsolower or raise interest rates. The interest rates can be lowered tomake borrowing cheaper in order to stimulate the economy or encouragemore spending in the economy(Rushe, 2012). On the other hand, it canraise interest rates to discourage borrowing and hence slow down thegrowth of the economy. The Federal Open Market Committee (FOMC) isthe arm of the Federal Reserve System that is mandated to formulatepolicies on the U.S monetary supply. In other words, the FOMC looksinto economic growth and stabilizing prices which has an effect on acountry’s employment rates. The FOMC sits down eight times annuallyand makes decisions on the way on matters related to monetarypolicies and the U.S economy as a whole.

TheFederal Reserve System is also responsible for supervising andregulating banks and other financial services institutions whichoperate within the U.S. In the U.S, there are more than 8,039commercial banks within the country. About 38% of these banks aremembers of the Federal Reserve. This means that over 3,030 banksaround the country have to adhere to the guidelines set up by thebank. For example, the Federal Reserve System requires that bankshold at least 3% of their capital in their respective Reserve Banks.

TheFederal Reserve System plays an important role in ensuring that thefinancial system operating in the country is stable and thatsystematic risk is contained in financial markets. Therefore, theFederal Reserve System is responsible for making sure that economy ofcountry does not collapse. However,as earlier citied the Federal Reserve System is an independent bodythat works with the government but sometimes the U.S governmentinterferes with the role of Federal Reserve System in the economy.The government is responsible for growing the nation’s economy andsometimes enacts policies that encourage employment and publicconsumption or spending. A good example of such a policy was duringthe housing mortgage crisis which was deemed to increase morespending on real estate and therefore boost the economy. However,since the government had not thought through the policy it sufferedas soon as people could not afford their mortgages due to highinterest rates. In such an event, the Federal Reserve System isrequired to intervene in order to stabilize prices and interestrates. Therefore, the government called upon the Federal ReserveSystem to increase the supply of money so that the interest ratescould go down. The Federal Reserve System achieved this by printingmore money (Rushe, 2012).

Finally,the Federal Reserve Bank other responsibilities include carrying outvarious function on behalf of the U.S government. Such roles includethe selling and buying of Treasury bonds to the public with the aimof raising money for the government. The Federal Reserve System alsocollects and makes several payments on behalf of the U.S governmentand making sure that the payments are made on time.

References

TheStructure of the Federal Reserve System.(2015). Retrieved February 26, 2015, from Federal Reserve Education:https://www.federalreserveeducation.org/about-the-fed/structure-and-functions

iMinds(2014). UsFederal Reserve.iMinds Pty Ltd, 2014

Rushe,D. (2012, June 20). What is the Federal Reserve and what does it do?Retrieved February 26, 2015, from The Guardian:http://www.theguardian.com/business/interactive/2012/jun/20/federal-reserve-explainer-video