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The Federal Reserve System - Essay Example

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The paper “The Federal Reserve System” looks at a stable monetary and financial system in the USA. The Federal Reserve Act of 1913 signed by Woodrow Wilson designated the Fed, the central bank, with the responsibility for establishing monetary policy…
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The Federal Reserve System
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The Federal Open Market Committee (FOMC) consists of the Board of Governors and Federal Reserve Bank Presidents. The FOMC is the monetary policymaking body that creates policies designed to stimulate economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. It makes responsible decisions concerning open market operations. In addition, the FOMC directs system operations in foreign currencies. The Board of Governors makes decisions regarding the cost and availability of money and credit in the economy.

The Board regulates banks, contributes to the monetary policy, and oversees the activities of the Federal Reserve Banks. Members of the Board of Governors include Ben S. Bernanke, the Chairman; Roger E. Ferguson, Jr., the Vice-Chairman, Susan Schmidt Bies, Mark W. Olson, Donald L. Kohn, Kevin M. Warsh, and Randall S. Kroszner all of whom are responsible for the discount rate and reserve requirements. The responsibilities for discount rate policy are shared with the Federal Reserve Banks. In 1976, the Consumer Advisory Council, consisting of consumer and creditor representatives was established to advise the Board of Governors on consumer-related issues.

Before the appointment to the Board of Governors, Bernanke was one of President Bush's top economic advisers. He received his bachelor's degree in economics from Harvard and his Ph.D. for MIT. He was a professor at Princeton University and chair of the Economics Department. As a member of the Federal Reserve Board, Bernanke is the first new Fed chairman in nearly two decades. The Federal Reserve Banks conduct research on the economy, supervise banks in their region, and provide financial services to banks and the United States government.

They hold cash reserves for depository institutions and make loans to them; move currency and coins in and out of circulation; collect and process millions of checks daily; provide checking accounts for the Treasury; issue and redeem government securities; and are the fiscal agents for the United States government. The Federal Reserve Bank districts include: Atlanta, GA; Boston, MA; Chicago, IL; Cleveland, OH; Dallas, TX; Kansas City, MO; St. Louis, MO; Minneapolis, MN; New York, New York; St.

, Philadelphia, PA; Richmond, VA; and San Francisco, CA Simplistically speaking, monetary policy is used to control the cyclical fluctuations in the economy. It influences economy activities, by manipulating the supplies of money and credit, thus altering the federal funds rate. Using the three monetary tools - open market operations, discount rate, and reserve requirements, the Fed regulates the money supply. Each affects the number of funds in the banking system. The open market operations are the purchases and sales of United States Treasury and federal agency's securities.

When the Fed desires to increase reserves, it buys securities and to decrease reserve, it sells securities. Such transactions affect the amount of money and credit banks posses, which affects the interest rates and the performance of the United States economy.

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