Description of Federal Reserve (Essay Sample)

Federal Reserve
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1 Description of Federal Reserve
Introduction
The Central reserve is the Central Bank of the United State of America. It was created in 1913 following the enactment of the Federal Reserve act by the Congress. It was created to supervise the country’s banks and control money sully in the economy. Since its formation and until now, the Federal Reserve has remained an independent institution from the government. For this case, it is neither privately owned nor owned by the U.S government (Mankiw, 2007).
FED structure, comprises of a Board of Governors which is made up of 7 members. In this board, the chairman and the vice chairman have to be appointed by the president of the United States and later be confirmed by the Senate.
FED being the central bank of the United States, it has various functions that it must conduct in effort to boost and control the country’s economy. Its function are;
* It is responsible for conducting nation’s monetary policy. In this regard, there may be need to control the economic situation in the country. In such efforts, Fed comes in by controlling by controlling the lending rates, interest rates, monetary policy and influencing price.
* Fed supervises and regulates the national banking and financial institutions in the country. It ensures that their operations are done on a free and fair way hence safe guarding a better financial system in the economy.
* Fed maintains stability in the United States financial market. Through the use of monetary policy tools, FED is a in a position to contain the prevailing risks in the financial market.
* Fed also serves foreign financial institutions, domestic financial and depository institutions as well as the U.S government. In this case, the Federal Reserve is seen to interlink the various institutions operating in the United States creating a free flow of money in the country.
Hence, its operations helps manage the country’s monetary system. In this case, the Federal Reserve is in a position to control adverse financial situations such as inflation or even recession. This may happen where in scenarios lending to inflation, the central bank takes measures to curb such occurrences. Like in any other economy, money is used as a medium for exchange, as a unit of account, as a storage value as it can be saved in different financial institutions. Thus, it has been used in exchange of both goods and services between businesses and individuals.
It is the Federal Reserve that determines the value of the U.S dollar, it often evaluate the economic situation of the country and make the necessary changes to strengthen it. It is also worth noting that, unlike other banks, the FED is the only bank that can generate the country’s currency for use in exchange. It has also the advantage of lending money to the government. Like any other bank, the Federal Reserve can lend money at an interest rate to other banks and financial institutions in the country. USA government has maintained independence of the bank as a way of minimizing biasness in its operation. Important to the United States government, is accountability of the overall performance of the Economy. FED deals with this through a Federal Open Market Committee (FOMC). FOMC is made up of the Board of Governors of the FED and five presidents from the reserve bank.
2 Federal Reserve monetary policy tool
Federal Reserve controls three main sections of the monetary policy. This are; the open market operations, the discount rates and the reserve requirements for banks and other financial institutions. FOMC is in charge of for all open market operations, while the Board of Governors looks into other banks’ reserve requirements as well as oversee on issues relating to open market operations (Federal Reserve, 2014).
The central bank of America controls the monetary system through the Federal Reserve. Here, the Federal Reserve usually exercises control over the depository each bank and other financial institutions should have with it in the Reserve Bank. This is in effort to control the country’s supply of money and availability of credit. Through this, FED remains as the center of the financial position of the economy. According to Federal Reserve (2014) website, the reserve requirement is the amount of money which the depository institution is required to hold as a reserve against a pre-specified amount in deposit liabilities.
The board of Governors according to the United States law has the sole authority of determining the reserve amounts. The reserve is usually held in terms of vault deposits or cash by the Depository institution to the Federal Reserve Banks. The reserve amount to be kept by the depository institution, is usually determined by use of reserve ratios that are already specified in the Federal Reserve Board Regulation to the financial institution’s reservable liabilities. Federal Reserve website specifies this reservable liabilities to be those consisting of Eurocurrency, transaction accounts and all the non-personal time deposits liabilities. Through this reserve ratio, then the Federal Reserve is in a position to regulate the money that is available to financial institutions for lending.
3 Economic analysis of the reserve requirement monetary policy
As noted earlier on, reserve requirement is the amount of money that each of the depository financial institution must keep on hold against their deposit liabilities. In effort to control the monetary policies in the country, the Board of Governors will often alter this reserve ratio. On its part, the Federal has overtime used this tool to control the economic situation of the country. The Federal Reserve Bank has been paying interest on the reserve balances; that is on the contractual clearing balance and the excess reserve balances. It does so as to eliminate the implicit tax which was previously imposed on depository institutions upon putting the reserve (Loungani & Rush, 1995).
By the use of this tool, FED has influence on the demand for as well as supply of balances each of the depository institution will hold as deposit on the Federal Reserve Bank. According to Montoro and Moreno (2011), in most economies of the world, reserve requirements is used as an alternative way so as to tighten the credit conditions. This seems to be the case in the U.S. When the Federal Reserve wants to regulate the amount of money available to the financial institutions for lending, it usually raise the reserve fund amount. This means that, the banks and the other financial institutions will have lesser funds which it can lend. Thus, less money is borrowed from this institution has money supply is reduced. This scenario when the Federal Reserve want to reduce the amount of money supply in the economy. In cases of inflation in the e...