What is the Real Role of the Fed in the Economy?
Monetary Policy Cause and Effect
EC301 Intermediate Macroeconomics
5 May 2013
The current status of the United States economy is a common discussion or topic in today’s media and in many individuals’ households. The state of the economy affects us all in nearly every aspect of our lives. Whether you’re grocery shopping, buying gas, registering your children for school, or exploring insurance rates, the economy has an effect on the bottom line price. While there are many factors that affect our current economy, understanding the duties of the Federal Reserve can improve one’s overall knowledge of how the system works and how the steps taken by the Federal Reserve can change the economy. It may also help someone understand the thought process behind why the price of gas will not decrease or why imports and exports pricing for the United States are currently not favorable. One of the primary functions, and the original reason for establishing the Federal Reserve is to conduct the United States monetary policy by persuading economic conditions by demanding maximum employment, stable pricing, and good interest rates .
Before further reviewing the monetary policy function of the Federal Reserve, a general overview of the entire bank and its functions needs to be established. The Federal Reserve is often referred to as the Central Bank of the United States. It was established by the United States Congress in 1913 to improve the economic state of the country by ensuring financial stability. Before it was established, the economic state of the United States was shaky to say the least. Congress created the National Monetary Commission to create an institution that would prevent and contain crisis in the future. Ultimately, this led to the Federal Reserve Act and then the Federal Reserve Bank. The bank was originally established to help be a financial back bone for depository institutions in times of need when widespread financial panic was on the rise. Over the years, it evolved and began participating in other functions. These include monetary policy, banking regulations, maintaining financial stability in the markets, and providing financial depository services to the government and other official foreign institutions . The deciding parties behind all of these functions include a Board of Governors, the 12 Federal Reserve banks located all over the country, the Federal Open Market Committee, and various other member banks and advisory committees. Many ask who comprises of all of these committees and boards with the recent financial crisis the United States has faced and the Federal Reserve has recently found itself in sticky situations. According to CNN Financial News Online, in an article published just recently, these committees weren’t even fully aware of the oncoming crisis until they were caught right in the middle of it when the Great Recession of 2007 began. It wasn’t until 9 months into discussing the imminent fall of the housing market and how it was going to affect the overall health of the economy that the discount rate was slashed and the federal funds rate was addressed. This was beginning of the Great Recession of 2007 and little did the Federal Reserve know that the United States would still be fighting these same issues in Spring of 2013 .
The goals of the monetary policy function of the Federal Reserve are derived from the Federal Reserve act. This act was put into place when the Federal Reserve was established and outlines the goal of promoting effective goals of maximum employment, stable prices, and moderate long-term interest rates. Stable pricing is the backbone of all three of those goals. Once pricing is stabilized and inflation or price hiking is controlled, it will cost less to operate businesses and households because goods, services, and material pricing will have leveled out and everyone can then afford to purchase more....
Cited: Kurtz, A. (2013, January 18). Federal Reserve was Blind to Crisis in 2007. Retrieved May 5, 2013, from money.cnn.com: http://money.cnn.com/2013/01/18/news/economy/federal-reserve-transcripts/index.html?iid=SF_BN_River
McGrane, V. a. (2013, May 1). Fed Says Bond Purchases Could Rise or Fall. Retrieved May 5, 2013, from online.wsj.com: http://online.wsj.com/article/SB10001424127887324266904578457050528365108.html
Six Years of Low Interest Rates in Search of some Growth. (2013, April 6). Retrieved May 5, 2013, from economist.com: http://www.economist.com/news/briefing/21575773-central-banks-have-cushioned-developed-worlds-economy-difficult-period-they-have-yet
The Federal Reserve System Purposes and Functions. (2005, June). Retrieved May 5, 2013, from federalreserve.gov: http://www.federalreserve.gov/pf/pdf/pf_complete.pdf
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