The Federal Reserve
Introduction
The U.S. central bank, generally referred to as the Federal Reserve, plays a crucial role in the U.S. financial system and economy. It is tasked with providing a stable, secure, and flexible monetary system. Also, it maintains payment systems and regulates banks. The Fed uses several tools and mechanisms such as open market operations, discount rate, and reserve requirements to perform all these operations. Nonetheless, this paper will expound more on the Federal Reserve’s role and structure, its policy goals and tool, and its regulation rules that should be altered.
The Ideal Role and Structure of the Federal Reserve
The ideal role of the Federal Reserve is to formulate, develop, and maintain an effective monetary policy and system. An effective monetary system maintains price stability, which essentially impacts the United States’ overall economy’s stability. Also, to Federal Reserve supervises and regulates banking operations and maintenance of an effective payment system. The structure of the Federal Reserve is multi-layered, which derives it authority from the 1913 Federal Reserve Law. The Fed is set up in such a way that it is independent of political forces or pressure from Congress or the President of the U.S. (Federal Reserve Bank of San Francisco). The Fed is subdivided into several components that help it carry out its mandate. The first is the Board of Governors that constitutes a seven-member board that manages the Fed’s overall tasks and responsibilities.
The second is the Federal Open Market Committee comprising a twelve-member board tasked with running open market operations. The third is the twelve regional Federal Reserve Banks, which have several roles, such as holding securities, lending, and regulatory roles (Federal Reserve Bank of San Francisco). I would not make changes to the Fed’s existing structure because the current structure ensures that the Fed carries out its mandate to the best of its ability. The current structure has ensured that the United States Federal Reserve system is one of the most influential in maintaining general price stability worldwide. The current structure also ensures that it is an independent body that ensures it makes proper policies outside political influence.
Federal Reserve Policy Goals and Tools
The Federal Reserve policy goals are to promote a robust U.S. economy by conducting its monetary policy. The U.S. monetary policy aims to support national goals of having stable prices, full employment and, stable and moderate long-term interest rates (Federal Reserve Education.Org). Generally, stable prices and moderate interest rates go hand in hand; hence, the two primary policy goals are stable prices and full employment in the U.S. economy. The Federal Reserve relies on three tools to carry out its mandate. The first is open market operations, which involve the sale or purchase of U.S. Treasury securities. The sale of securities reduces the number of reserves in the banking system, reducing the money supply, hence, reducing lending activity. The purchase of securities increases the money supply, which stimulates lending activity by banking institutions.
The second tool is the reserve requirement, which is the mandatory amount of money banks are required to have in their reserves. Increasing the reserve requirement reduces the money supply while reducing the reserve requirement increases the money supply. The third tool is the discounting rate. This refers to the rate at which banks borrow from the Fed (Federal Reserve Bank of St. Louis). An increase in this rate reduces the banks’ incentive to borrow, leading to a decrease in the money supply. A decrease in the discount rate will increase the incentive for banks to borrow, increasing the excess reserves for lending out. I would not suggest any changes to the existing set policy goals. Stable prices and full employment are primarily the two most important policy goals that central banks are supposed to deal with. Increase these policies may lead to the Fed overstepping its mandate, and also it may lead to the loss of efficiency and effectiveness in the way it operates.
Fed’s Regulatory Rules or Practices to Alter
The United States has one of the best banking institutions in the world. However, the 2008 Financial Crisis highlighted that the Fed and the financial sector requires serious changes. The period before the financial crisis was characterized by the deregulation of the financial sector and the lack of proper oversight. Banking institutions were allowed by the Financial Services Modernization Act of 1999 to use their deposits to invest in derivatives (Federal Reserve History). This was a recipe for disaster as financial institutions could invest in corrupt incentives that led to fraud in credit rating agencies and in the mortgage market. In essence, to avoid a repeat of such practices, the Fed should revise its set standard of operations for financial institutions such as banks, by implementing stringent policy guidelines and regulations, preventing financial instructions from engaging in predatory and fraudulent practices that could not only negatively impact consumers but also the economy as a whole.
Conclusion
The paper highlights the role and structure of the Federal Reserve, its policy goals and tool, and its regulation rules that should be altered. The Fed has a multi-layered structure that is composed of the Board of Governors, Federal Open Market Committee, and regional Federal Reserve Banks. This structure was formulated to help the Fed to perform its role of developing and maintaining a monetary system, regulating banks, and maintaining payment systems. If the Fed performs its role well, it will help the U.S economy in its policy goals of achieving price stability and full employment. To perform all its functions, the Fed requires tools such as open market operations, discount rate, and reserve requirements. Nonetheless, despite its proper structure and roles the some of its regulatory rules should be altered to prevent banks and other financial institutions from committing fraudulent practices.
Works Cited
Federal Reserve Bank of San Francisco. What is the Fed: Structure. n.d. <https://www.frbsf.org/education/teacher-resources/what-is-the-fed/structure/>.
Federal Reserve Bank of St. Louis. Making Sense of the Federal Reserve. n.d. <https://www.stlouisfed.org/in-plain-english/how-monetary-policy-works>.
Federal Reserve Education.Org. Monetary Policy Basics. n.d. <https://www.federalreserveeducation.org/about-the-fed/structure-and-functions/monetary-policy>.
Federal Reserve History. Financial Services Modernization Act of 1999, commonly called Gramm-Leach-Bliley. 12 November 1999. <https://www.federalreservehistory.org/essays/gramm_leach_bliley_act>.