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Federal Reserve System Essay

950 Words4 Pages

Most commonly (and discernibly) referred to as “the Fed,” the Federal Reserve System (FRS) is considered to be, arguably, the most powerful financial system globally. Founded in December of 1913 by then president Woodrow Wilson as part of the Federal Reserve Act, the FRS was created to provide the United States with a safe, flexible, and stable financial system. Today, being responsible for managing the supply of money and credit in the economy, sustainable economic growth, and regulating banks and additional financial institutions, the FRS acts as the central bank of the U.S guaranteeing the soundness of the U.S. economy (McConnell et al., 2011). As a central bank, the FRS performs a few central functions: it acts as a banker to the central …show more content…

These five include that of conducting the nation’s financial policy to 1. “promote maximum employment and stable prices in the U.S. economy,” 2. “[promoting] the stability of the financial system” in addition to “[seeking] to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad,” 3. “[promoting] the safety and soundness of individual financial institutions and [monitoring] their impact on the financial system as a whole,” 4. “[fostering] payments and settlement system safety,” and 5. “[promoting] consumer protection and community development” (Federal Reserve System). The FRS achieves these functions with its three entities: the Board of Governors, 12 Federal Reserve Banks, and the Federal Open Market Committee. Firstly, the Board of Governors is considered to be the governing body of the FRS, run by 7 members who are nominated by the President. They guide the operation of the FRS. The 12 Federal Reserve Banks and their additional 24 branches are the “operating arms” of the FRS, gathering data within their individual districts that are then factored into financial policy decisions made. Finally making up the FRS is the Federal Open Market Committee (FOMC), the part of the FRS which establishes national financial policy. The FOMC makes all decisions surrounding the stance of financial policy. As a whole, these three entities are key to making decisions …show more content…

Being that the FRS conducts financial policy within the government, employment and inflation are impacted by its actions as well as the availability and cost of money. An example of the impact of the Federal Reserve on the economy is the flow of money within the economy. To illustrate, money flows from individuals and firms (the public) to banks. Banks will then use those funds to loan money to, again, the public. The Federal Reserve comes into play when it can buy bonds to implement new reserves, increasing bank lending as a result. This increased bank lending forms new deposits. Reversely, the FRS can also sell bonds, taking reserves away from the system and reducing bank lending (Principles of Economics,

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