Essays on Federal Reserve

To begin with, it should be noted that Federal Reserve System (Fed) – is a system, which together serves as the central bank of the United States of America. The state plays a decisive role in the management of the Federal Reserve, although the ownership of capital is private with a special status of the shares. It is essential to note that decisions of the Federal Reserve are not subject to ratification by the President or by any employee of the government. However, the Fed is accountable to Congress and, therefore, to American people for its policies. Also, all appointments to the Board of Governors of Federal Reserve, including the appointment of the Chairman and Vice Chairman of the Board members, are conducted by the President with the consent of the Senate. Under these circumstances, and considering that the Fed operates within the overall objectives of economic and financial policies of the government, it would be more accurate to characterize this system as “independent within a government”.

The current functions of the Fed are: performance of the U.S. central bank duties; maintaining a balance between the interests of commercial banks and national interests; providing oversight and regulation of banking institutions; consumer credit protection;control of money supply; ensuring financial system stability, control of systemic risks in financial markets; providing financial services to depository, including the U.S. Government and official international agencies; participation in the system of international and domestic payments; elimination of liquidity problems at local level. Moreover, Fed entrusted to issue banknotes (Federal Reserve notes), which constitute nearly 90% of all cash in the country, keeping the required reserves of banks-members of the Federal Reserve, granting of loans to commercial banks and rediscount bills of exchange, purchase of government securities, cash service of the federal budget; implementation of inter-bank clearing accounts, foreign currency transactions and storing gold reserves to foreign governments, according to Board of Governors of the Federal Reserve System (2002).

It can be said that the Fed serves as an important instrument of state monopoly control and regulation environment. Its monetary policy aimed at mitigating the crisis of falling production, to overcome inflation, etc. Federal Reserve makes its own contribution to the U.S. economic and financial goals, working on finance and credit in the economy. As the country’s central bank, it provides long-term economic growth within its capacity, while ensuring reasonable price stability. It should be mentioned that the Fed seeks to implement its policies so as to resist the deflationary and inflationary pressures as they arise and, as lender of money, in a crisis situation it is responsible for using the tools of their policies in order to prevent a national crisis of liquidity and financial panic. The U.S. Government has entrusted the Federal Reserve System many monitoring and regulatory functions. For example, it is liable for the amount of the loan used to buy or sell securities, regulate overseas activities of U.S. banks and the activities of foreign banks.

Moreover, Fed monitors compliance with laws governing bank holding companies, controls the banks, sets rules to protect consumers’ interests (informed and honest attitude towards them in certain credit transactions), according to Robert Longley (2010).

As a fact, the main objectives of the Fed are the country’s economic growth, maintaining a minimum level of unemployment as well as ensuring the stability of the U.S. dollar. The Fed is one of the main regulators of the country, which affects the full change in the economic life and policy of the U.S., almost the same effect the Fed has on the financial markets. Professional participants of the financial market closely monitor any potential future changes of monetary policy in order to be able to react in time to changes. To achieve these objectives the main regulator of the U.S. has special tools in its arsenal. First of all, it is a change of the interest rate. By reducing the level of basic interest rate, the Fed allows commercial banks to borrow federal funds at a lower price and there is a process of economic incentives. In turn, with the aim of tightening of monetary policy, the Fed raises borrowing rate thus constraining economic growth. In addition, significant tool to influence the economic situation is to conduct open market operations. By buying or selling securities, the Fed stimulates or hinders economic growth rate of the country. Moreover, the Fed has the ability to change the reserve requirements for commercial banks. The higher is the rate of the minimum reserve ratio of loans to commercial banks – less credits commercial banks can provide and vice versa, according to Robert Longley (2010).

To sum it up I would like to say that Federal Reserve plays a key role in monetary policy within the U.S. It should be noted that the function of the government’s bank is unique and exist only in the U.S., while others functions are inherent to other Central Banks. It should be noted that Fed is a Central Bank of the largest world economy, and consequently, Fed has considerable influence on the financial markets. As a fact, hundreds of thousands investors all over the world thoroughly watching regular press-conferences of the Fed’s Chairman Ben Bernanke and immediately react of his messages.