Fed Vs Recession Essay Research Paper The

Fed Vs Recession Essay, Research Paper

The economy of the United States of America is the largest in the world. In 2000, the U.S. had a Gross Domestic Product (GDP) of 9,318.5 billion dollars. (Real Gross Domestic Product, 2001) The United States has an economy that is market driven but government regulated. Because the economy is market driven, it tends to have a cyclical nature. The market contracts, which causes a decrease in GDP, and it expands which causes the GDP to rise. This cycle is constantly in motion.

Before the Great Depression, the government did not intervene with the economy. It did nothing to boost the economy during a slump or slow it down if it grew too fast. The economic thinkers of the time believed that the economy would self-adjust if anything was to happen. Once the economy began its downward spiral in 1929, it did not self-adjust itself. It was during this time, that Lord Keynes suggested that government intervene. This became the basis for modern day economics.

Today, the government plays on active in the economy. Its primary goal is to act as a moderator for when it grows and slows down. It also acts to promote economic growth while keeping inflation low. One of the major factors that

helps to achieve this balance is the Federal Reserve System.

Congress created the Federal Reserve System in 1913 to act as the central bank of the United States. (Board of Governors, 2001) The Federal Reserve System has four primary duties. These are to conduct the nation s monetary policy, supervise and regulate banking institutions while protecting the credit rights of consumers, maintaining the stability of the financial system, and to provide financial services to the U.S. government, the public, financial institutions, and foreign official institutions. (Board of Directors, 2001) The Fed also maintains price stability and economic stability. (Koudsi, 2001, p. 30)

The Federal Reserve is comprised of 12 districts. There are 12 branches and twenty-four branches. The Board of Governors is made up of 7 members. The president chooses them to serve fourteen-year terms. However, the Senate must confirm these appointments. The president also designates the Chairman of the Board and the Vice-Chairman. The Senate also approves these positions. The officers are appointed for four-year terms. (Structure of the Federal Reserve, 2001) The Board of Governors is in charge of setting the discount rate.

The Federal Open Market Committee establishes policies in order to foster the long term goals of price stability and sustainable economic growth . (Federal Open Market, 2001) The FOMC is in charge of setting the target Federal Funds rate. The Federal Open Market Committee is comprised of the seven members of the Board of Governors plus the President of the Federal Reserve Bank of New York and four other seats which are held by the other Presidents of the other Federal Reserve Banks. These four seats are rotated among the Presidents of the other Federal Reserve Banks and they are held these positions for one year. The FOMC elects its own chairman and vice-chairman at the beginning of each year. Traditionally, the Chairman of the Board of Governors is elected Chairman and the President of the Federal Reserve Bank of New York is elected Vice President. (The Federal Open Market Committee, 2001)

The FOMC is considered the most important monetary policymaking body of the Federal Reserve System. It is responsible for creating policies. These policies are designed to promote economic growth, full employment, stable prices, and sustain a pattern of international trade. It makes key decisions regarding the conduct of open market operations purchases and sales of U.S.

government and federal agency securities which affect the provision of reserves to depository institutions and, in turn, the cost and availability of money and credit in the U.S. economy. The FOMC also directs System operations in foreign currencies. (The Federal Open Market Committee, 2001)

The current Chairman of the Board of Governors is Dr. Alan Greenspan. He is also the chairman of the FOMC. From 1974 to 1977, he was the Chairman of the Presidential Council of Economic Advisors for President Ford. Then in

1981, he became the Chairman of the National Commission on Social Security, a position he held for three years. (Members of the Board, 2001) He was appointed to the Board of Governors in August of 1987 to fulfil an un-expired spot. Dr. Greenspan was re-appointed in February of 1992 for a full fourteen-year term. Throughout his political career, Alan Greenspan has dealt with many economic slowdowns and recessions.

What exactly is a recession though. The most common definition of a recession is two consecutive quarters of decline. Although definition deals with a decline in GDP, some economics feel that simply a decline is not ample description of what a recession should be defined as. Some

feel that it should be defined as a period when the unemployment rate rises by at least one percentage point that is when GDP growth falls significantly below its potential rate . (Don t Mention the R-Word, 2001, p.22)

The United States economy is not officially in a recession. Throughout 2000, the net worth of American households fell for the first time in fifty years. (Can the World Escape Recession, 2001, 21) The Confe