The Federal Reserve and Its Monetary Policy

Topics: Federal Reserve System, Inflation, Monetary policy Pages: 6 (2174 words) Published: April 26, 2013
The Federal Reserve and Its Monetary Policy
The United States Federal Reserve Bank was found in 1913. The Federal Reverse Bank was created after congress passed the Federal Reserve act. This was because of financial panics that kept happening manly the financial panic of 1907. The United State attempted to set up this bank before but it was always shut down after 20 years. The Federal Reserve Act is also known as the Glass-Owen Bill. The Republican controlled Senate pushed the bill through when many members of the US Congress were home for the holiday. The President Woodrow Wilson signed it into law one hour after being passed by the congress (Krautkramer). The Federal Reserve System is an independent central bank. Although the President of the United States appoints the chairman of the Federal Reserve Bank, and this appointment is approved by the United States Senate, the decisions of the Fed do not have to be ratified by the President, or anyone else in the executive branch of the United States government. Also in the act was the granted the Federal Reserve Bank total power over the monetary policies of all US banks (Krautkramer). The task of the Federal Reserve System is to maintain employment, keep prices stable, and keep interest rates at a reasonable level by regulating monetary policy. Components of the Federal Reserve System also supervise banks, provide financial services, and conduct research on the United States economy and the economies in the surrounding region. The Fed consists of the Board of Governors in Washington, D.C., and twelve Federal Reserve District Banks. The federal bank 12 main districts are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis Kansas City, Dallas, and San Francisco. New York is the main one because that is where most of the biggest banks in the United States are located(Krautkramer). The seven Governors on the Federal Reserve Board are appointed by the President of the United States and then approved by the Senate. The Fed is considered independent because of a couple of reason. The appointments are staggered to reduce the chance that a one United States President could can hand pick his the Board with the people he wants. The second reason is that their terms of office are 14 years which are much longer than a president term in office. Each Reserve Bank President is appointed to a five year term by that Bank’s Board of Directors and then has to be approved by the Board of Governors. This procedure adds to independence because the Directors of each Reserve Bank are not chosen by politicians (Krautkramer). The Fed is structured to be self sufficient; the fed gets its funds from the interest on the loans that it gives out This means it is independent from congress decisions about funding so it can hire who it wants and also buy want it wants. One of the main functions of the Federal Reserve Bank is to make the monetary policy of the United States of American. The group that makes most of these decisions is the federal open market committee also known as the FMOC. The FOMC meets in Washington, D.C. eight times a year and has twelve members which are the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four of the other Reserve Bank Presidents who serve in rotation. The goal of FMOC and the monetary policy goal are to keep prices stable. This means control the inflation rate on prices this is done by controlling the money supply. The second is to keep unemployment low and to operate the economy at full employment which is around five percent (Feldstein). The amount of goods and services the economy produces and the number of jobs the economy has both depends on factors other than monetary policy. Monetary policy just helps promote these in a positive way. The other factors beside monetary policy include technology and the people with money preferences for saving, risk, and work...

Cited: Feldstein, Martin. "What Powers for the Federal Reserve?" The National Bureau of Economic Research. 2 Nov. 2010. Web. 10 Dec. 2011
Krautkramer, Wayne N. "The Federal Reserve - Its Origins, History & Current Strategy." Web. 10 Dec. 2011
"The Federal Reserve System." The Federal Reserve System. Cnchost. Web. 10 Dec. 2011.
"U.S Monetary Policy." San Franisco Federal Reserve. Federal Reserve Bank of San Francisco, 2004. Web. 10 Dec. 2011.
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