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Federal Reserve System – Its Creation, Majors Roles, Powers and Responsibilities

Federal Reserve – Its Creation, Major Roles, Powers And Responsibilities

The Federal Reserve System among other government systems in the US stands out to play certain unique roles and responsibilities. It acts as the central bank of the United States. Since it was first created in 1913, its roles, responsibilities and goals have evolved through time to the current obligations it has(Lawrence, 1997).

To begin with, the Federal Reserve System’s main aim objective is to control the economy. It stands as a separate business entity from the government and therefore has no regulation under the government. It possesses the power to print currency and consequently, that of causing inflation. It can also lower or raise interest rates and to generally stabilize the country’s financial system(Wicker, 1966).

Apart from the powers, the Federal Reserve has a dual mandate of prize stabilization and employment, both of which are independent of each other. As such, the system conducts the nation’s monetary policy by manipulating credit and monetary conditions with an aspiration of getting maximum employment, moderate long-term interest rates and stable prices.Besides these responsibilities, the Federal Reserve regulates and supervises banking intuitions so there can be soundness and safety of the financial and banking system of the nation(Wicker, 1966). In this way, it also protects the credit rights of citizens who are consumers in the banking system.

The major roles of the Federal Reserve are essential because the organization is the gatekeeper of the U.S. economy and as the government’s bank, the organization is charged with the mandate to regulate the financial institutions of the nation. Overall, the promotion of sustainable growth, the promotion of high levels of employment, the moderation of long-term rates of interest and ensuring the stability of prices to help in the preservation of the dollar’s purchasing power all fall under the mandate of the Federal Reserve. This makes Federal Reserve the country’s money manager, the government’s bank, the banker’s bank, and the ultimate regulator of all the financial institution in the United States.

In summary, the Federal Reserve System maintains the stability of the nation’s financial system and taking up the systemic risk that is often a consequence and possibility in financial markets. It therefore ends up providing other auxiliary and relate services such as providing financial services to the US government, depository institutions, foreign institutions and others operating the nation’s payments system.

The Federal Reserve Powerpoint Presentation

Assignment Instructions

Your boss has chosen you to give a presentation to a number of foreign officials regarding the United States Federal Reserve System. These officials are very interested in doing business in the United States, but they would like to learn more about the Federal Reserve and how it operates.

Develop a 10- to 15-slide presentation.

Address the following questions and include a notes page which contains the write-up portion to each question:

  • What are the factors that would influence the Federal Reserve in adjusting the discount rate?
  • How does the discount rate affect the decisions of banks in setting their specific interest rates?
  • How does monetary policy aim to avoid inflation?
  • How does monetary policy control the money supply?
  • How does a stimulus program (through the money multiplier) affect the money supply?
  • Currently, what indictors are evident that there is too much or too little money within the economy? How is monetary policy aiming to adjust this?

Sample Presentation to Foreign Officials on Federal Reserve

Introduction

  • The Federal Reserve is the central bank of the United States whose unique structure includes the Board of Governors, in Washington, D.C., a federal government agency, together with 12 regional Reserve Banks.
  • It was initially created by the congress to stabilize the country’s financial system. (Board of Governors of the Federal Reserve System (U.S.), 1974).

Factors that influence the federal system in adjusting discount rates

  • The bankers bank: when depository institutions pay interest on money they borrow from the federal reserve, the interest rate comes out as discount rates. As the discount rate is passed on to us, loan interest start fluctuating.
  • Adjusting for inflation: when businesses rise prices, the federal reserve tries raise the discount rates so as to cut demand.
  • Adjusting for recession: after a recession, the federal reserve try’s to lower the discount rate so as to avoid a depression. It in turn encourages borrowing so that the public can get back on its feet financially.
  • Discount rate adjustments: fluctuations in interest rates affects businesses profits according to how the federal reserve adjusts discount rates.

 

How the discount rate affects decisions of banks in setting their specific interest rates

  • As the discount rates lower, the banks are able to get loans from the federal reserve and even loan out more to its customers. Money supply in turn increases. (Board of Governors of the Federal Reserve System (U.S.), 1974).

How monetary policy aims to avoid inflation

  • Monetary policy influences the economy’s demand for goods and services as well as inflation. As the federal reserve system reduces interest rates, there is an increased demand for goods and services which in turn pushes wages and costs higher. It finally shows demand for materials and workers needed for more production. (Board of Governors of the Federal Reserve System (U.S.), 1974).

How monetary policy controls money supply

  • If the federal system buys back, already issued securities, for instance, money supply, from security dealers and large banks, money supply is increased in the hands of the public. However, money supply is decreased when the federal reserve sells securities. (Board of Governors of the Federal Reserve System (U.S.), 1974).

How a stimulus program(through the monetary multiplier) affects money supply

  • The money multiplier is constituted by the additional amount of money generated by every additional dollar reserved.
  • Money multiplier can be then used to assess and model money policy decisions. Money movement can be restricted to move in the economy by the monetary policies.
  • Money moves faster when interest rates are low.

Indicators evident that there’s too much or too little money within the economy. How monetary policy aims to adjust this

  • Inflation, monetary and fiscal policies are good indicators. If inflation goes high, there are greater injections than leakages.
  • Monetary policy affects economy’s interest rates. High interests encourage savings rather than spending.
  • When inflation goes high, interest rates are raised to cut down consumption and hence demand.

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Federal Reserve, Stabilizing Current Economy and Monetary Policy

The Federal Reserve Board testimonies, press releases, monetary policy reports, the Beige Book, and a variety of other publications offer a detailed assessment of current economic activity, financial markets, and the monetary policy tools used to promote economic activity and preserve price stability.

Write an eight to ten (8-10) page paper in which you:

  1. Evaluate the role and the effectiveness of the Federal Reserve in stabilizing the current economy.
  2. Determine which economic indicators the Federal Reserve should analyze so it can better stabilize this particular economy.
  3. Describe which monetary policies the Federal Reserve might use to influence the money supply.
  4. Explain the strengths and weaknesses of using monetary policy in comparison to fiscal policy when promoting economic activity and preserving price stability.
  5. Analyze the effect of the Federal Reserve’s action you identified in #3 on the aggregate demand / supply model.

The specific course learning outcomes associated with this assignment are:

  • Analyze the basic operation of banks, the structure of the banking industry, and the major regulatory processes controlling banks.
  • Evaluate monetary policy and its impact on economic growth and business cycle.
  • Analyze the various theoretical approaches and models and assess their use in shaping monetary policy.
  • Use technology and information resources to research issues in money and banking.
  • Write clearly and concisely about money and banking using proper writing mechanics.

Monetary Policy and the Federal Reserve – Federal Reserve

What Fed Does and What it ought to be Doing?

Fed is an independent United States central banking system which was established in 1913 after the enactment of the Federal Reserve Act. Fed main duty is to execute the monetary policy of the nation Fed is responsible for executing and formulating depository, regulating and supervising depository institutions, offering an elastic currency, helping the financial operations of the federal government, and serving as the U.S. government banker. Moreover, Fed contains an essential role in operating systems of nation payment, safeguarding the rights of consumers while dealing with banks and enhancing community reinvestment and development. Therefore, Fed is responsible of controlling the economic status of the country, defining the banks rending rates, the minimum deposit rate before receiving a loan and thus defining the country’s economic status (Fed, 2015).

Policies Fed Need to Impose

Fed is responsible of defining monetary policy which involves Fed influence to the cost and availability of credit and money to assist in enhancing national the non-inflationary growth economic goal. Fed employs three tools to instrument monetary policy open market operations being the most essential one. The two other tools include operations of discount window that give secured short-term loans to depository institutions with temporal funds requirement. The third tool is reserve requirements which establish the demand deposit proportions accounts and time deposits which have to be held as Fed non-interest bearing reserves (Fed,2015).

Consequences of Some of the Policies

The Fed policies basically the financial position of the country and thus the company’s economic status. The three monetary policy tools determine the flow of funds in the market. In this regard, Fed can regulate inflation and recession in the country. Some of these policies therefore are responsible of inflation like the recent 2008 recession that was brought about by poor lending policies.