Federal Reserve System And Monetary Policy

1363 words - 5 pages

Federal Reserve System and Monetary policy
Amir Jahangir

Federal Reserve System and Monetary policy

Introduction
United States Federal Reserve system, also known as Federal Reserve or simply “Fed” is the United States central banking system. The Federal Reserve took inception in 1913, after the adoption of the Federal Reserve Act. The United States Congress has mandated three macroeconomic objectives to the Federal Reserve. These are minimum levels of unemployment, prices stability and keeping in check the rates of interests. Over the years, the role of Federal Reserve has expanded. It now formulates the country’s monetary policies, conducts supervision and regulation of the banking institutions, maintenance of the financial system stability and provision of financial services to the United States government, depository institutions and other foreign institutions. The Federal Reserve is made up of the Board of Governors, Federal Open Market Committee (FOMC) and twelve regional branches located in the major cities of the United States.

Discussion
Every country in the world has a central banking system, for the purposes of regulation and monitoring of the country’s respective financial system. So is the case of United States financial system. However, the performance of Federal Reserve over the years is now under question and intense scrutiny.
Federal Reserve Operations
The operations which the Federal Reserve conducts presently, restricts economic and political freedom to a large extent. The world is moving towards globalization, and the very idea of a central bank restricting or rather dictating a government on how to formulate economic policies, and controlling the finances of the private individual is in conflict. It is important that we analyze the operations of Federal Reserves over the years. Federal Reserve was formed in 1913, which makes it only a century old. The purpose of its creation was pretty straight-forward, that is, to prevent failures in banking (Meltzer & Allan, 2010). During the time of its inception, the United States had gone through a vicious banking crisis in 1907. The crisis gained importance as it was observed how Knickerbockers Trust failed to receive support from its peers, even after voluntarily seeking for it. It ultimately faced collapse due to failure in receiving support. This also had a significant influence on the psychology of the public as the peers of Knickerbockers apart from not recuing it, also cancelled payments to each other. The New York Stock Exchange collapsed by fifty per cent until liquidity was injected by the initiatives of financier J.P. Morgan which then relieved the situation to some extent. The legislators then in response vehemently advocated putting in place a central banking system, which would be able to provide liquidity in the case of a wholesale downfall. It can be said with hindsight that the machinery back then used to be very sophisticated. The Wall Street Journal...

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