Essay On How The Federal Reserve Hurt The Economy

How the Federal Reserve Has Hurt the American Economy The Federal Reserve is one of the least understood but most influential American institutions. Its responsibilities include fighting unemployment, ensuring healthy wage growth, and protecting the value of the U.S. dollar. To put it very simply, the job of the Federal Reserve is to keep the economy running as smoothly and efficiently as possible. At the top of the Federal Reserve structure is the Federal Open Market Committee. This is comprised of the Board of Directors, which has seven members, and five Federal Reserve bank presidents. The chairman of the FOMC is also the chairman of the Board of Directors. The chairman is the one who reports to Congress on behalf of the Federal Reserve.

It controls interest rates through the federal fund rate, which is correlated with the prime rate of lenders. If the economy is growing too fast and inflation is on the rise, it will “slow” the economy by raising interest rates. These raised interest rates cause people to borrow less, and thus inflation decreases. If the economy needs to be catalyzed, the Federal Reserve lowers interest rates. This causes people to borrow more, thus stimulating the economy and raising inflation. A method the Federal Reserve has used especially since the Great Recession is quantitative easing. In this method, the Federal Reserve buys government securities or other securities on the market. These securities are also known as bonds. By purchasing enough bonds, the Federal Reserve lowers interest rates and increases the money supply, in theory stimulating the

In practice, it is not quite as effective as it might appear. Its power is often overestimated. Unemployment has still not reached pre-recession levels, although it has seen modest gains. And currently, substantial wage growth is only being seen among the wealthy, while everyone else is only seeing very modest gains. This is because the Federal Reserve is able to manufacture a boom bust cycle with its actions. By lowering interest rates, an artificial boom is created as people borrow more and make more big purchases like cars and houses. But many of these people overextend themselves, because they have been lulled into a false sense of prosperity. Then inflation goes up and the Federal Reserve decreases the money supply. This causes a bust, as people suddenly can no longer afford the things they could just recently. Many people suddenly lose everything to the banks, and the wealthy get wealthier while the average person is in a worse off situation than before the initial period of economic growth. The cycle is then free to repeat itself over and over, and has continually done so since the creation of the Federal Reserve. Not even twenty years after the Federal Reserve Act was signed in 1913, the country saw the greatest economic struggle in its history in the Great Depression. And the Federal Reserve has fully acknowledged its role in this. Ben Bernanke, the chairman before the