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Federal Reserve
The Federal Reserve System, or simply the Fed, is the central bank of the United States. It performs five general functions to promote the effective operation of the U.S. economy and the public interest.
The Fed uses monetary policy to address the economic goals of Congress. To understand the factors of economy, you must understand the role of the Federal Reserve and the use of monetary policy.
This assignment will allow you to learn and understand what the Federal Reserve is, why it is important, and how it works.
Using what you have learned, write a paper that addresses the following:
Describe a brief overview of the Federal Reserve System, who owns it, its structure, and its objectives. Define monetary policy. Explain how the Federal Reserve works with Congress to implement monetary policy actions. Assess the role of the Federal Reserve and the tools it employs to control the supply of money through its monetary policy actions. (Look at the actions the Federal Reserve takes and evaluate the results of those actions.)
Full Answer Section
Profits generated by the Fed are remitted to the U.S. Treasury.
1. Who Owns the Federal Reserve Banks | In Plain English | St. Louis Fed
2. FRB: Finance and Economics Discussion Series: Screen Reader Version - The Federal Reserve's Balance Sheet and Earnings: A primer and projections
The structure of the Fed comprises three key components:
The Board of Governors: This seven-member board, appointed by the President and confirmed by the Senate, oversees the Federal Reserve System.
1. Board Members - Federal Reserve Board
12 Federal Reserve Banks: These regional banks are located throughout the country and are responsible for implementing monetary policy, supervising banks, and providing financial services.
1. The Fed Explained - Who We Are - Federal Reserve Board
Federal Open Market Committee (FOMC): This committee, composed of the Board of Governors and five presidents of the Federal Reserve Banks, determines monetary policy.
1. The Fed Explained - Monetary Policy - Federal Reserve Board
The Fed's primary objectives are to promote maximum employment, stable prices, and moderate long-term interest rates.These goals are often referred to as the Fed's "dual mandate."
1. Monetary Policy: What Are Its Goals? How Does It Work? - Federal Reserve Board
2. www.numerade.com
3. The Federal Reserve's "Dual Mandate": The Evolution of an Idea | Richmond Fed
Monetary Policy
Monetary policy refers to the actions undertaken by a central bank, in this case, the Federal Reserve, to influence the supply and cost of money and credit in an economy.These actions are designed to achieve specific economic objectives, such as price stability, full employment, and economic growth.
1. Monetary Policy: Stabilizing Prices and Output
The Fed and Congress
While the Fed is independent in conducting monetary policy, it operates within the framework established by Congress.The Federal Reserve Act of 1913 outlines the Fed's powers and responsibilities.Congress also sets the Fed's overall goals and objectives, such as price stability and maximum employment.
1. Federal Reserve System: What It Is and How It Works - Investopedia
2. Federal Reserve Act
3. Monetary Policy - Federal Reserve Board
The Fed and Congress maintain a collaborative relationship. The Fed regularly reports to Congress on its activities and economic outlook. Congress, in turn, can influence the Fed's actions through legislation and oversight. However, it is important to note that the Fed has operational independence, meaning it can make decisions about monetary policy without direct political interference.
1. FRB: Monetary Policy Report, February 26, 2013 - Part 1: Recent Economic and Financial Developments
2. The Importance of Central Bank Independence | CEA | The White House
The Fed's Tools and Their Impact
The Fed employs several tools to control the money supply and influence economic conditions:
Open Market Operations: This involves the buying and selling of government securities in the open market.Buying securities injects money into the economy, while selling securities withdraws money.
1. Economic Issues No. 5--Transformations to Open Market Operations
Discount Rate: This is the interest rate the Fed charges banks for borrowing money. Lowering the discount rate encourages lending, while raising it discourages it.
1. II. The Federal Reserve and Control of the Money Supply - Economics 504
Reserve Requirement:This is the percentage of deposits that banks must hold in reserve.Lowering the reserve requirement increases the amount of money banks can lend, while raising it decreases it.
1. I. The Money Creation Process - Economics 504
2. 2 Reserve Requirements and Monetary Management: An Introduction in - IMF eLibrary
By adjusting these tools, the Fed can influence interest rates, which in turn affect borrowing, spending, and investment.For example, lowering interest rates can stimulate economic growth by encouraging borrowing and spending.Conversely, raising interest rates can help to slow down an overheated economy and control inflation.
1. How Central Banks Affect Interest Rates - Investopedia
2. The Fed - Why do interest rates matter? - Federal Reserve Board
3. How do higher interest rates help to lower inflation? - Bank of England
However, the effectiveness of these tools can be influenced by various factors, including economic conditions, consumer confidence, and global events. Moreover, there can be time lags between the Fed's actions and their impact on the economy.
1. Long and Variable Lags in Monetary Policy | St. Louis Fed
Evaluating the Fed's Performance
Assessing the Fed's performance is complex and often involves evaluating the extent to which it has achieved its dual mandate of maximum employment and price stability. The Fed's actions are frequently criticized, with some arguing that its policies have contributed to inflation, while others contend that it has failed to stimulate economic growth adequately.
It is essential to consider the broader economic context when evaluating the Fed's performance. Factors such as fiscal policy, global economic conditions, and technological advancements can also significantly impact economic outcomes.
Ultimately, the Fed's role as the central bank is crucial in maintaining a stable and prosperous economy. By understanding its structure, objectives, and tools, we can better appreciate the complexities of monetary policy and its impact on our lives.
Sample Answer
Overview of the Federal Reserve System
The Federal Reserve System, commonly known as the Fed, is the central bank of the United States.Established in 1913 by Congress, its primary mandate is to promote a stable economy by influencing monetary and financial conditions.Unlike many other central banks, the Fed is a hybrid institution, possessing both public and private characteristics.
1. Federal Reserve Board - Home
2. The Fed - What is the purpose of the Federal Reserve System?
3. Structure and Functions of the Federal Reserve System
Ownership of the Fed is somewhat complex. While it is not owned by the government or private shareholders in the traditional sense, the Federal Reserve Banks are owned by commercial banks that are members of the Federal Reserve System. However, these member banks do not receive dividends or share in the profits.