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In: Finance

what is the ebokutuin and nature of central banking un the United States?

what is the ebokutuin and nature of central banking un the United States?

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Expert Solution

The Federal Reserve, more commonly referred to ‘the Fed’, is the central bank of the United States of America and is hence the supreme financial authority behind the world’s largest free market economy. Because of the magnitude of the US’ influence on the global economy, ‘the Fed’ is considered one of the most influential financial institutions in the world.

The Federal Reserve, in addition to being the financial adviser and regulator of the US Government, handles the monetary policies of the government independently and without legislative intervention. In addition to that, it performs all other functions of a central bank – regulating bank activities, conducting surveys about the US and global economy – all under the common objective of maintaining financial stability.

The Federal Reserve is headquartered in Washington D.C.

History of the Fed

The Fed was born indirectly out of the “Panic of 1907,” and the overall economic situation of that time. The last quarter of the 19th century and the beginning of the 20th century were characterized by recessions in the US economy. A series of financial panics forced eminent bankers like J.P. Morgan and John D. Rockefeller Jr. to call for a new central banking system.

The country’s dire financial situation then prompted Republican Senator Nelson Aldrich to set up two separate commissions to study the American monetary system and the European central banking institutions. Aldrich was highly influenced by the model of the Bank of England and the German monetary system. Although his initial proposals were repeatedly rejected by Congress, a reformatted bill was finally passed on December 22, 1913.

Since the creation of the Federal Reserve, other pieces of legislation have shaped the structure and operation of the nation’s central bank. Following the Great Depression, Congress passed the Banking Act of 1935, which established the Federal Open Market Committee (FOMC) as the Fed’s monetary policymaking body. The Federal Reserve Reform Act of 1977 was enacted during a period of surging inflation. It explicitly set price stability as a national policy goal for the first time. The Full Employment and Balanced Growth Act, approved in 1978 and known informally as the Humphrey–Hawkins Act, established full employment as a second goal of monetary policy and required the Fed to report to Congress on its policy twice a year. Most recently, following the severe financial crisis of 2007-08, Congress passed the Wall Street Reform and Consumer Protection Act of 2010. The law, known as the Dodd-Frank Act, affects the Fed in many ways. It changes the Fed’s governance, increases its transparency, expands its regulatory responsibilities, and transfers most Fed consumer protection responsibilities to a new Consumer Financial Protection Bureau.

Nature of US Central Bank

Functions of the Federal Reserve

The Federal Reserve is the central bank of the United States and thus, is responsible for maintaining the overall stability of the country’s economy.

  1. Conducting monetary policy – The Federal Reserve, through its monetary policy, strives to achieve three major objectives as laid down by Congress: maximum employment, stable prices, and low long-term interest rates. The Federal Reserve controls inflation, investment, and other economic parameters by controlling the availability of credit in the economy.
  2. Promoting financial system stability – The Federal Reserve ensures the stability of the US financial system, monitoring internal and external influences, and preventing any future crisis.
  3. Regulating financial institutions and their activities – The Federal Reserve supervises the activities of financial institutions and controls their impact on the economy as a whole.
  4. Fostering payment and settlement system safety – The Federal Reserve works to ensure a glitch-free secure system for payment gateways for the benefit of the American citizens.
  5. Promoting consumer protection – Consumer rights are an integral component of the financial services sector, and hence the Federal Reserve works continuously to ensure these rights for all consumers.

Structure of the Fed

The Federal Reserve central bank is a multi-layered financial body, deriving its authority and spirit from the Federal Reserve Law of 1913. Despite being an executive agency, the financial body is largely independent of the control of the President or Congress and is hence described as being “independent within the Government.” The Federal Reserve’s four main axes of power include the following:


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