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Role of the Federal Reserve Bank in the United States Economy

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Role of the Federal Reserve Bank in the United States Economy

Introduction

The Federal Reserve Bank, commonly known as the fed, is the central bank of the United States of America. Some experts call it the “bankers’ bank” because it supervises all the commercial banks in the United States and it is also the countries’ lender of last resort. There are twelve Federal Reserve banks evenly distributed across the twelve Federal Reserve districts. The Federal Reserve System structure, as enacted by the congress in 1913, features the twelve Federal Reserve banks and the federal board of governors. On the other hand, the Federal Open Market Committee, commonly abbreviated as FOMC, is a committee made up of seven governors of the Federal Reserve Board and five presidents from the Federal Reserve banks.

Roles of the Federal Reserve Bank

The Federal Reserve Bank carries out various roles aimed at stabilizing, growing, and developing the countries’ economy. These roles which include setting and implementing monetary policies for the control of supply of money, supervision and regulation of the operations of commercial banks, and the provision of effective payment services. The Federal Reserve Bank performs these roles with the help of the board of governors in Washington D.C., the Federal Reserve banks, and the Federal Open Market Committee.

The Federal Reserve Board of Governors

The president of the United States appoints the governors of the Federal Reserve Board for a fourteen-year term subject to removal by a sitting U.S. president for cause. The board of governors have various roles starting with the supervision and regulation of both the Federal Reserve banks and the commercial banks. Concerning the Federal Reserve banks, the Federal Reserve Board is mandated to make the appointment for three directors of Federal Reserve banks, approve Federal Reserve Bank budgets and expenditures, and vet the presented candidates for Federal Reserve banks’ presidency. The Federal Reserve Board is also responsible for supervising and regulating both foreign and domestic United States financial institutions to ascertain whether U.S. financial institutions comply with financial laws and regulations. Nonetheless, this Federal Reserve Board role has been delegated to Federal Reserve banks. Additionally, the Board of Governors also has a role in participating in the Federal Open Market Committee.

The Federal Open Market Committee

The Federal Open Market Committee is chaired by the chairmen of the Board of Governors and deputized by the president of the New York Federal Reserve Bank. The committee is responsible for setting up contractionary and expansionary monetary policies. These monetary policies include determining appropriate open market operations, setting the reserve requirements rate, setting up the interest rates for borrowing by commercial banks, and direct actions. For instance, the ongoing covid-19 pandemic has caused a shrink in the economy hence the feds through its chairman of the Federal Open Market Committee Jerome Powell, issued various expansionary measures. These measures include the purchase of $700 billion worth of treasury bonds and lowering of interest rates in a bid to make borrowing for commercial banks easier thereby, increasing the supply of money in the economy (Setser, 2020).

Conclusion

The Federal Reserve Bank is governed by the Federal Board of Governors who monitor and approve the Federal Reserve Bank expenditures, including the salaries of the Federal Reserve Bank directors. Other than being accountable to the senate, the Federal Reserve Board is also an independent body. Therefore, its role and functions are free of any political interferences.  In agreement with the governing of the feds, like most financial experts and economists, the fact that the Board of Governors operates independently is convenient for me.

 

 

 

 

 

Reference

Setser, B. (2020). How Is the Fed Dealing With the Coronavirus Crisis? Council on Foreign Relations. Retrieved 10 May 2020, from https://www.cfr.org/in-brief/how-fed-dealing-coronavirus-crisis.

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