Jonathan Reeder

ECON 2020

4/18/16

Professor Wilson

The Federal Reserve Policy

Before taking Micro and Macroeconomics I had heard the term Federal Reserve System, but I didn’t really know what it was. The Federal Reserve System or “the Fed” is the central bank of the United States. The fed was created by Congress “to provide a safer, more flexible, and more stable monetary and financial system.” (1)It was created on December 23, 1913. President Woodrow Wilson Signed the Federal Reserve Act. The Federal Reserve Policies play a big role in the nation’s economy and it affects us as individuals.According to the Federal Reserve website there are four general areas of the Federal Reserve:

First: conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.

Second:supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.

Third: maintain the stability of the financial system and containing systemic risk that may arise in financial markets.

Fourth: providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.

The Federal Reserve System was designed to give a perspective on economic activity throughout the nation. It is composed of the Board of Governors in Washington D.C. There are twelve regional Federal Reserve Banks located in major cities throughout the nation. These locations share responsibility for supervising and regulating certain financial institutions and activities. They provide banking services to depository institutions and to the federal government. This ensures that consumers receive adequate information and fair treatment in their business with the banking system.

The group that determines what the policies are is The Federal Open Market Committee or FOMC. There are twelve members of the FOMC. Seven of the members are from the Board of Governors and the other five come from the twelve Reserve Bank Presidents. The Chairman of the Board of Governors is also the Chairman of the FOMC. The president of the Federal Reserve Bank of New York is a permanent member of the Committee and is the Vice Chairman of the Committee. “All of the Reserve Bank presidents, including those who are not voting members, attend FOMC meetings, participate in the discussions, and contribute to the assessment of the economy and policy options. The FOMC oversees open market operations, which is the main tool used by the Federal Reserve to influence money market conditions and the growth of money and credit. The FOMC also authorizes currency swaps and large-scale asset purchases.” (2) The Federal Reserve Banks were established as the operating arms or branches of the nation’s central banking system. Services provided to depository institutions and the federal government by the network of Reserve Banks is similar to the services commercial banks and thrift institutions provide to business customers and individuals. Although the Federal Reserve Banks do not provide services to individuals. The Federal Reserve Bank gathers anecdotal information on current economic conditions eight times every year. They publish this report in The Beige Book.

Zucchi said “The Fed acts behind the scenes to touch our lives in many ways - from clearing checks that we cash to processing electronic transfers or payments we make though our online bill pay accounts or when we transfer money from one account to another.” (3) Almost everything we do that has to do with money is affected by the Federal Reserve policies. The monetary policy is often discussed in the media because of the widespread impact on an individual’s ability to purchase goods and services. It controls the interest rates. It can provide money to banks so they can then lend that money to businesses so that they can hire. Zucchi explained “Or if it believes the consumer (that’s you and I) needs to spend more money so that businesses can make more and hire more, then it can lower interest rates s that car loans, home loans, and credit card interest rates are cheaper for us.” (3)

Two of the other duties it has are centered on supervising and providing services to banks. The Federal Reserve can change the level of cash reserves that banks are required to maintain depending on how much they want to lend.

The final duty is to maintain stability of the financial system. It can do this by increasing or decreasing the money supply. Financial news likes to focus only on the Federal Reserve’s actions. But the Federal Reserve really does affect our lives and matters to us if we want to buy goods and services and maintain a job. Zucchi finally said “When the financial system becomes out of whack, the effects are felt immediately by all consumers and the Fed’s job of ensuring that all is working within a controlled balance becomes paramount to maintaining a well-run, efficient economy.”

What does the Federal Reserve System do to influence the economy? Many people believe that the Federal Reserve controls the economy by affecting the supply of money in the U.S. but it actually does not control it. It is there to maintain a target interest rate and adjusts the flow of money when needed to keep the rate at the desired level. According to Thoma the key to understanding how the Fed conducts monetary policy is the market for bank reserves. Thoma explains “When customers deposit money into their checking account, the bank must hold a fraction of the deposit as reserves. Presently, the fraction is roughly 12 cents per dollar; the other 88 cents can be used to make loans or purchase financial assets, as regulations allow.” (4) This is important to know because it ties back to how the Fed watches the flow of money and determines when they need to make adjustments. This procedure helps to keep things in balance during normal times to keep the economy on track. But in times like the when there is recession like there was in 2008 the Fed has to use other, non-standard tools to stimulate the economy.

In conclusion, the Federal Reserve System’s Policies do affect us in our daily lives. So if we want to buy a car or a house we will be affected on the type of car or size of our house depending on the interest rates which are controlled by the Fed. This is why we have times like when interest rates are low; it is a buyers’ market for a house. Rather than when they are high it is a sellers’ market.

Bibliography

  1. "Current FAQsInforming the Public about the Federal Reserve."FRB: What Is the Purpose of the Federal Reserve System?N.p., n.d. Web. 19 Apr. 2016. <
  1. "Current FAQsInforming the Public about the Federal Reserve."FRB: How Is the Federal Reserve System Structured?N.p., n.d. Web. 19 Apr. 2016. <
  1. Zucchi, Kristina. "The Federal Reserve System Affects You More Than You Might Think | Investopedia."Investopedia. Investopedia, 05 Sept. 2014. Web. 18 Apr. 2016. <
  1. Thoma, Mark. "Explainer: How Does the Fed Influence the Economy?"CBSNews. CBS Interactive, n.d. Web. 18 Apr. 2016. <