Federal Reserve Essay Research Paper In order

Federal Reserve Essay, Research Paper

In order to advance economically, the government of any region must make efforts to create forms of buying power. There are various ways in which this situation could be approached. In the United States, one of the most powerful institutions with the ability to do this is the Federal Reserve System. The Fed is responsible for enforcing many of the federal laws that protect consumers in their dealings with state-chartered banks that are members of the Federal Reserve System. It also assumes the role of being responsible for the United States’ Monetary System, which actually influences the growth of money and credit in the U.S. economy.

Since its establishment by an act of Congress in 1913, the Fed s primary role has been to foster a sound monetary and financial system and a healthy economy. To advance this goal, each branch of the Federal Reserve helps formulate monetary policy, supervises and regulates banks and bank and financial holding companies, helps maintain the stability of the financial system, and provides financial services to banks and other depository institutions and the federal government. To carry out its primary functions, the Federal Reserve needs information about the economy. The Board of Governors and each of the twelve regional Reserve Banks maintain staffs of economists and analysts whose research helps inform the decisions that go into monetary policy making, supervising and regulating banks, and serving and maintaining the stability of the financial system. Staff research focuses on every aspect of the economy, from the local to the international level. At the Atlanta Fed, for instance, studies may range from analyzing the makeup of rural banking markets in the Southeast to designing and testing economic forecasting models used in policy making.

The Federal Reserve supervises and regulates bank and financial holding companies, state-chartered banks that are members of the Federal Reserve System, foreign activities of all U.S. banks, and U.S. activities of foreign banks. As a supervisor, the Fed monitors, inspects, and examines banking organizations to determine their condition and to make sure they comply with current laws and regulations. As a regulator, the Fed creates and issues regulations and guidelines that govern banks structure and conduct. These regulatory standards are designed to ensure that banks operate according to safe and sound banking principles and meet the needs of their communities.

The Federal Reserve System established Community Affairs offices at each Federal Reserve Bank and the Board of Governors in 1981. This was done, as a method of specialization in that these offices would be able to determine what needs should be met for specific areas of the country. These offices work with banks, bank and financial holding companies, nonprofit and for-profit development organizations, and local governments to identify a particular community s credit needs and ways to address those needs. The primary goal of the Fed s Community Affairs program is to promote effective community development lending, investment programs, and fair lending.

In order to make buying power available, the government must consider a major factor: inflation. When the supply of money grows too rapidly in relation to the economy’s ability to produce goods and services, inflation may result. It is a case of too many dollars in the hands of buyers chasing the same amount of goods. On the other hand, too little growth in the money supply can lead to such problems as recession and unemployment. As the money flow slows down, people have fewer dollars to spend for various goods and services. Businesses, in turn, receive less money for the goods and services they produce and have less to spend for the resources they use.

Through monetary policy, the Federal Reserve tries to avoid either of these extremes. To do so, the Fed analyzes the national economy and seeks to influence growth in money and credit that will contribute to stable prices, high employment, and growth in the economy. The Federal Government can put more money in the economy, by buying U.S. government securities on the open market. The Fed pays sellers for the securities. They, in turn, deposit the money in various financial institutions. While these financial institutions are required by law to keep a certain percentage of this money on reserve, they are free to loan out the remainder.

For example, suppose Kate Smith is holding a U.S. Treasury bond, one she can sell at any time. Through a broker, she sells this bond to the Federal Reserve for $1,000. At this point the Fed, using power granted to it by the U.S. Congress, pays Ms. Smith by creating $1,000 that did not exist before. If we were to write a check for $1,000, that money would come out of our bank account. But the Fed’s check creates new money by adding to banking reserves. Ms. Smith deposits the $1,000 in Trustworthy Bank. Trustworthy must keep a certain amount on reserve. We’ll suppose the bank’s reserve requirement is 10 percent. Of the $1,000 deposit, then, Trustworthy can loan out $900, known as its excess reserves. Bill Jones, an insurance salesman, needs to borrow $900 for new computer equipment for his office. Trustworthy Bank credits Jones’ bank account with $900, money he will later repay. In turn, Jones writes a check to Computerwise Co. for $900. This