Question

What is the major purpose of the Federal Reserve System? What is the responsibility of the Board of Governors and the Federal Open Market Committee? Should the Fed be independent as it is now or should it be a federal gency subject ot the direction by Congress or the President? Why or why not?

Answer 1

The most critical and visible function of Federal Reserve is to carry out monetary policy. It is solely done to deal with inflation as well as preserve stable prices. To obtain the above mentioned things the Fed sets a 2.0 percent inflation target for the core inflation rate. Maximum employment is also pursued by it. The main aim is the natural rate of unemployment of 4.7-5.8 percent. The Fed also moderates long-term interest rates by the way of open market operations along with the fed funds rate. The objective of monetary policy is healthy economic growth.

Next, the Fed supervises and regulates several of the nation’s banks to guard consumers. It also maintains the permanence of the financial markets while constrains potential crises. It provides banking services to other banks, the U.S. government along with foreign banks. It is America's central bank which makes it the most authoritative solitary actor in the U.S. economy along with the world.

The Federal Reserve System has three components, the Board of Governors directs monetary policy while its seven members are in charge for setting the discount rate as well as the reserve requirement for member banks. Staff economists make available all analyses.

The Federal Open Market Committee oversees open market operations which includes setting the target for the fed funds rate, thus guides interest rates. The board members along with four of the twelve bank presidents are members meet eight times a year.

The Federal Reserve Banks administer commercial banks in addition execute policy. They supervise commercial banks along with the board .

It Manages Inflation by administration of credit which is the largest constituent of the money supply. The Federal Reserve sets for the nation's banks the reserve requirement. It oversees approximately 5,000 bank holding companies, 850 state bank members of the Federal Reserve Banking System plus any foreign banks operating in the United States.

The Federal Reserve worked intimately with the Treasury Department to thwart global financial collapse throughout the financial crisis of 2008. The Fed buys U.S. Treasurys from the federal government, which we call monetizing the debt. That's for the reason that the Fed creates the money it uses to buy the Treasurys, while adding that much money to the money supply.

The FOMC holds eight frequently planned meetings per year. Economic and financial conditions are revived. The appropriate position of monetary policy is also determined by it, along with the assessment of the risks to its long-run goals of price stability and sustainable economic growth.

The Federal Open Market Committee is comprised of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; moreover four of the remaining eleven Reserve Bank presidents, while serving one-year terms on a rotating basis

The board of governors having seven of the 12 seats on the Federal Open Market Committee, determines U.S. monetary policy. The board only has power over changes in reserve requirements, moreover it must endorse any change in the discount rate which is initiated by a Federal Reserve Bank.

The board members often bear witness before congressional committees on the economy, banking supervision, monetary policy, and regulation, financial markets and consumer credit protection .

The strongest case for an independent Federal Reserve rests on the vision that putting the Fed to more political pressures would pass on an inflationary bias to monetary policy. In the observation of various observers, politicians in a democratic society are shortsighted for the reason that they are motivated by the want to triumph in their next election. While this being their primary objective, they are not likely to focus on long-run objectives of the state welfare but they will seek short-run solutions to problems, even if the short-run solutions have unwanted long-run results.

Fed is more likely to be concerned with long-run objectives if it is guarded from being tempered or influenced by the politicians and thus be a guardian of a sound dollar as well as firm price level.

Getting the Fed under the control of the president or congress is also well thought-out to be unsafe for the reason that the Fed can be used to facilitate Treasury financing of huge budget deficits by its purchases of Treasury bonds. Thus the treasury pressure on the Fed to "help out" may possibly cause more inflation in the economy. A sovereign and independent Fed is better competent to refuse to accept this pressure from the Treasury.