Federal Reserve Essay Research Paper Purpose and

Federal Reserve Essay, Research Paper

Purpose and Function of The Federal Reserve I. The History of The Federal Reserve A. Financial Panics B. Federal Reserve Act C. Structure and Focus II. Federal Reserve Board A. FRB Members B. Federal Open Market Committee C. FOMC Members III. Federal Reserve System A. Monetary System Work B. Federal Reserve Banks IV. Four Basic Functions of the Federal Reserve A. Monetary Policy B. Regulating Financial Institutions C. Serving as Banker D. Payment Services V. Monetary Policy Function A. Main Purpose B. Influence Over C. FOMC Meetings VI. Open Market Operations A. Definition B. Examples C. Limitations VII. Discount Rate A. Definition B. Original Design VIII. Reserve Requirement A. Definition B. Explanation C. Federal Funds Rate D. Y2K Concerns IX. Public/Private Structure of Fed A. Representation B. Funding C. Ownership X. System Policy Objectives / Conclusion The Purpose and Function of The Federal Reserve Before Congress created the Federal Reserve System, the United States had been plagued by severe booms and busts and financial panics, which contributed to many business bankruptcies, bank failures and economic downturns. In 1907 yet another crisis prompted Congress to create some kind of an institution that would counter these kinds of financial disruptions, and bring Federal oversight to a largely unregulated banking system. The Federal Reserve Act was passed by Congress and President Woodrow Wilson signed it into law on December 23, 1913. Its purpose was to establish Federal reserve banks, to establish a more effective supervision of banking in the United States, to keep our money valuable, and to give the nation a more flexible and stable monetary and financial system. It was structured as an American version of a central bank, with Reserve Banks and branches in 12 districts across the country, coordinated by a Board of Governors in Washington, D.C. and would carry out the constitutional mandate of Congress to coin money and regulate the value thereof. The Federal Reserve System is commonly called The Fed, is known as the central bank of the United States, and over the years its role in the economy and banking has expanded, but its focus is still the same. The Federal Reserve Board is made up of seven Presidential appointees, including the Fed Chairman, whose terms are 14 years in length. Their job is to govern the Federal Reserve System. Its members also serve on the Federal Open Market Committee (FOMC), which sets monetary policy. The other members of the FOMC include 5 presidents of the 12 district Federal Reserve Banks. The Federal Reserve System does the work that is necessary in any monetary system. It processes checks, serves as a clearinghouse for bank transactions, processes Treasury securities transactions, and lends money. It determines the interest rate for loans to commercial banks, selects the required reserve ratio which determines how much customer deposits a bank must keep on hand (which affects how much new credit the bank can create ), and also decides how much new currency Federal Reserve Banks may issue each year. It releases coins and currency notes produced by the Treasury Department, to the commercial banking system. The demand for money by the public varies from day to day and from week to week. There are even differences from season to season. Banks are usually first to feel the impact of the public s demand for cash. To meet these needs, banks turn to their regional Federal Reserve bank for coins and currency when their supplies are low. The Federal Reserve Banks are used to clear checks, to lend money to banks that are temporarily strapped for reserves, to issue currency, and to hold reserve deposits of member banks. Today the Fed has four basic functions: 1) Conducting the nation s monetary policy by influencing the supply of money and credit. 2) Regulating and supervising financial institutions, banking operations and protecting the credit rights of consumers. 3) Serving as banker and fiscal agency for the United States Government. 4) Supplying payment services to the public through depository institutions. All four roles are important in maintaining a stable growing economy, but influencing the supply of money and credit — the monetary policy function — is the most important and probably the function with which people are most familiar. Monetary policy is the strategic actions taken by the Federal Reserve to influence the supply of money and credit in order to foster price stability and maintain economic growth. In this way, the Fed helps keep our national economy strong and the world economy stable. This influence over monetary policy is the Fed s real authority, and the reason for its enormous prominence in the financial world. The Fed s main purpose regarding monetary policy is to ensure that enough money and credit are available to sustain economic growth without inflation. If there are signs that inflation is threatening our purchasing power, the Fed may need to slow the growth of the money supply. It does this by using three tools – the discount rate, reserve requirements and most important, open market operations. Two main committees direct Fed policies. They are the Board of Governors and the Federal Open Market Committee. Two other organizations assist the Fed Board. The Federal Advisory Council advises the board on business and financial conditions, and the Consumer Advisory Council advises the board o