Federal Reserve System Essay

The Federal Reserve System FIS/260 By Tabitha Scott Some of us may not understand the functions of the Federal Reserve system or even know how this system operates. The Federal Reserve System was designed to rectify the conditions underlying the recurrent money panics that has long effected our country for many years. The act has been amended several times to further the Federal Reserve System’s ability to foster a sound financial system and to support a healthy economy. The Federal Reserve System advances its goal through several means. Its monetary policy decisions affect the flow of money and credit in the economy.

This contributes to the safety of the national financial system by establishing regulations and acting as a commercial bank supervisor. It is also used by serving as a bank for depository institutions and the federal government, the Federal Reserve System helps to ensure that the system of paying for all kinds of business transactions works efficiently. The structure of this system is to safeguard the Federal Reserve from short-term political pressures while also ensuring its fundamental accountability, the System was set up to be independent within government.

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We also should know that this system operates on its own earnings rather than on congressional appropriations. The Federal Reserve works within government, however, only in the sense that it formulates monetary policy to reach overall goals that are set forth by Congress and the President himself. Although the Federal Reserves specific decisions does not have to be approved by the President or any other executive branch, the system must however report to Congress. Congress made the Federal Reserve system so Congress has the power to alter/change or even abolish the System at any time they want to.

The structure of the Federal Reserve System also includes and provides internal checks and balances ensuring that their decisions and operations are not dominated by any one System component. There also many functions of the Federal Reserve system. As the U. S. central bank, the Federal Reserve carries many different functions that affect the nation’s economic well-being. Through monetary policy, which has influences on the availability of money and credit. The Federal Reserve also plays a major role in keeping the inflation in check to promote our economic growth.

The objective of the nation’s economic policy are to protect the purchasing power of the U. S. dollar, to encourage conditions favorable to sustainable economic growths and a high level of employment, oh and also keep a reasonable balance in transactions with other nations. The Federal Reserve System contributes to those objectives by its monetary policy actions affecting the availability as well as cost of money and credit. The Federal Reserve seeks to adjust monetary policy to the changing economic conditions that are based on policy decisions on the current economic and financial information.

Depository institutions would often request to borrow money from the Reserve Banks to cover temporary deposit drains. The discount rate, which is the rate of interest charged on these short term, or long term, or even seasonal “discount window” loans, is set by Reserve Banks’ boards of directors. The loans are then approved by the Board of Governors. When ever there are changes in the discount rate this can either inhibit or encourage financial institutions’ lending and investment activities by allowing it to go high or less expensive for them to obtain funds.

Even though the discount rate may have little direction on market conditions, a change in the discount rate can be an important signal towards the Federal Reserves policy direction. Like the federal government, the Federal Reserve System was designed to be a compromise between national and regional powers. Their regional base, (the 12 Reserve Banks) allows the System to be more flexible and innovative to ensures that its decisions Federal Reserve System Structure and Functions and actions are broadly based.

The Federal Reserves major functions account for its structure and for their unique and different position in the federal government. Accountable to the government while working independently. The System is able to maintain its monetary policy goals without the pressures from short term political considerations. Since its founding in 1913, the Federal Reserve System has rapidly grown to meet the needs of the changing financial system and its growing economy.


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