How The Federal Reserve Runs The Country

1581 words - 6 pages

The Federal Reserve System (The Fed) is the central bank of the United States. It was created by congress by the passage of the Federal Reserve Act in 1913. The Federal Reserve System is composed of the Board of Governors (in Washington D.C.), and twelve regional Federal Reserve Banks located in major cities (New York, St. Louis, Boston, Philadelphia, Kansas City, Richmond, Chicago, San Francisco, Minneapolis, Atlanta, Dallas and Cleveland) throughout the United States. Today, the Federal Reserves duties fall into four different categories: 1.) conducting monetary policy; 2.) plays a major role in supervising and regulating banking institutions and protecting the rights of consumers in regards to credit rights; 3.) maintaining the overall stability of the financial system ; 4.) providing miscellaneous financial services to foreign and domestic financial institutions, the general public and the U.S. government. The Federal Reserve Bank derives its authority from congress and is considered to be independent due to the fact that its decisions do not have to be ratified by anyone in the executive or legislative branch of the government including the President. Income and expenditures of the Federal Reserve banks and the Board of Governors are not subject to the congressional appropriation process. The Fed's earnings come primarily from interest received on the Reserve Banks' holdings of U.S. government securities and from fees they charge depository institutions for providing services such as processing and clearing checks. Any net earnings are paid annually to the U.S. Treasury. In 2002 the Fed's net earnings equaled $24.49 billion. The Fed's actions have a significant effect on U.S. interest rates and, subsequently, on the stock, bond, and other financial markets.One of the most powerful tools that the Fed has to control inflation and keep the economy in check is the ability to increase or decrease the federal funds rate. "The Federal Reserve Act specifies that the FOMC should seek to promote effectively the goals of maximum employment, stable prices (inflation), and moderate long term interest rates. At each meeting the FOMC closely examines a number of indicators of current and prospective economic developments. Then, cognizant that its actions affect economic activity with a lag, it must decide whether to alter the federal funds rate. A decrease in the federal funds interest rates stimulates economic growth, but an excessively high level of economic activity can cause inflation pressures to build to a point that ultimately undermines the sustainability of an economic expansion. An increase in the federal funds rate will curb economic growth and help contain inflation pressures, and thus can promote the sustainability of an economic expansion, but to large an increase could retard economic growth too much. The committee's actions on interest rates are undertaken to achieve the maximum amount of economic growth consistent with price stability and...

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