The Federal Reserve
The Federal Bank of the United States is like the central bank of any other country. However, in the US, it is one of the most powerful financial institutions, since it is mandated with the task of providing the nation with a safe, flexible and stable monetary and fiscal system. It is also an independent institution, enjoying the freedom of ratification from the President or any other powerful government official, but it works under the oversight of the U.S Congress, which keeps it in check to work under the existing government’s economic and financial policies. Most people recognize the bank as ‘the Fed.’
Brief History of the Federal Bank
The Federal Reserve created in December 1913 by the U.S Congress, acts by the Federal Reserve Act. The 19th century severely saw the fall of many banks and businesses, with most of them characterized by cases of bankruptcy, economic disruption, and panics. Its establishment was precipitated by the events that took place before 1907, where the country was in repeated financial turmoil and panic, which crippled the U.S economy.
After its creation, the bank was credited for its successive navigation of the economy through the Great Depression in 1930. Over the decades, the bank has seen the expansion of its roles and responsibilities, under the renowned Federal Reserve System, steering the U.S economy through harsh economic times such as the Great Recession in the 2000s.
Today, the Fed is distributed across regions in the US, known as Federal Reserve district headquarters. They are namely; San Francisco, Kansas City, St. Louis, Chicago, Richmond, New York, Philadelphia, Boston, Minneapolis, Dallas, and Atlanta. The bank’s board of governors, which is presidentially appointed, sits in Washington D.C.
Functions of the Federal Bank
The main role of the Federal Bank is to help banks in the U.S cushion themselves from banking panics. However, when broken down, the duties of the bank are spelled out in the Federal Reserve Act as follows;
- Execute the Monetary Policies- Here, the Federal Open Market Committee sets up and excites the U.S monetary policy. The monetary policy seeks to promote maximum employment in the banking sector, stabilize exchange rates and moderate the long-term interest rates in the economy. Some of the tools of monetary policy at the bank’s disposal include; Open market operations, discount rates and reserve requirements.
- Create a Stable Financial System in the U.S- The Federal Bank monitors the entire financial system through analyzing the systemic risks that may endanger the country’s economic health. It engages with both local and foreign households, communities and businesses to help in the stabilization of the economy in the long run.
- Supervise and Regulate Financial Institutions and Activities- The Fed promotes the safe and sound functioning of the commercial banks and individual financial institutions in the U.S. The bank monitors their operations and measures their impact in the financial system in general.
- Promote Consumer Protection and Development- The bank oversees the advanced supervision on community reinvestments through research to increase better understanding by the public as a whole. It is through the cushioning consumers of financial and banking services, which consumers get to understand the role of the bank to the community. Additionally, the bank also protects the credit rights of the consumers.
- Foster Payment and Settlement System Safety and Efficiency- The bank ensures the efficiency and availability of an accessible financial system for the U.S dollar transactions all over the world in foreign business entities.
- Serve as Lender of Last Resort- The bank acts as a lender to banking or financial institutions that cannot secure credit elsewhere. Though this, it saves such banks and institutions from the risk of collapsing which may lead to serious financial implications for the economy.
Federal Funds Rate
It is the interest rate in which depository institutions such as banks, saving and credit societies can borrow and lend from each other and to the public for both short and long-term business needs.
- Short-term interest rate- It is the rate paid to a holder of a short-term debt security such as commercial paper or Treasury bill given by private lenders.
- Long-term Interest Rate- Any change in the long-term interest rate has an effect on the stock prices and personal wealth. For example, a decline in the long-term interest rates tends to push for a rise in stock prices and vice versa.
- Dollar Exchange Rates- It mainly touches on the value of the U.S dollar in international trading. For example, a fall in the dollar exchange rates puts the U.S dollar in an unfavorable position, depicting as weak currency to international investors, with the opposite being true. A depreciation of the dollar also means that the value of imports to the U.S goes up, compared to the exports.