The Federal Reserve - Essay Example

?The Federal Reserve Introduction The Federal Reserve is one of the chief operators of the United s financial system. Even as its function is ofprimary importance, most American's are less familiar with the Federal Reserve than any of the major government entities. Indeed, its confusing structure, organization, and responsibilities make it difficult for most American's to understand. In explaining the Federal Reserve, the New York Times describes it as having, “exercised more influence over economic growth and the level of employment than any other government entity.” (NYT, Web) The article argues that even as the Federal Reserve has been in existence since 1913, it wasn't until the 1970s that it assumed as great a control of the American financial system as it has today. History, Structure, and Function The Federal Reserve was created in 1913 by Woodrow Wilson (Wells 2010). In the late 19th and early 20th centuries credit was controlled entirely by private banks. Farmers in the mid-western regions grew increasingly upset by this fact, as they complained that oftentimes the banks would alter their credit options at times when the farmers were vulnerable. The Federal Reserve was created as a compromise, with the banks still controlling credit, but the government determining the supply of funds (Wells 2010). While the intervening years have seen significant reforms in the way the Federal Reserve operates, its underlining function has remained the same. Private banks are able to borrow from the reserve at a discounted rate, they then loan this money to borrowers at the federal funds rate, or interest rate. As the Federal Reserve raises rates, so must the banks raise the rates of loans. This system is designed to ensure fair and equitable lending throughout the country. The current chairman of the Federal Reserve, who was recently reappointed in January of 2010, and Alan Greenspan and Paul Volcker preceded him (Johnson, Web). Federal Open Markets Committee (FOMC) The Federal Open Markets Committee is a branch of the Federal Reserve that has the responsibility of regulating the United States’ open market operations. While there are a great variety of committees and functions with the Federal Reserve, this committee perhaps is the most notable as it functions to make essential decisions about interest rates and the general growth of the supply of money within the country (Chandler 1971). These are factors that directly and significantly affect major aspects of the nation’s economy. In these regards, the FOMC is the primary monetary branch of the Unites States. The committee functions in a variety of complex, but well structured ways. In these regards, the committee meets and sets short-term objectives for long-term objects within a long-term structure of economic understanding. The short-term objectives work to ensure that the federal funds rate remains constant. In addition to regulating the federal funds rate, the Federal Open Markets Committee oversees operations that the Federal Reserve has overtaken abroad. They accomplish this task in close collaboration with the United States Treasury department. In terms of meeting structure, the FOMC is required by law to meet at least four-times per year, but generally they convene eight times annually (Chandler 1971). During the meetings, open reports are presented by committee members. The committee then works toward reaching a consensus in regards to policy decisions. During this entire process the Manager of the System Open Market Account oversees the policy presentations. What I Learned & My Point of View In research the Federal Reserve there was a great amount of structural and historical information I gained, but perhaps the greatest insights I gained were in regards to how the Federal Reserve functioned during the recent economic recession. When the recession hit the Federal Reserve began the process of lowering interests rates to increase consumer spending. At this point, the Fed has virtually lowered the interest rate to 0%. In addition to lowering the interest rate the Fed has engaged in a number of unorthodox methods in an effort to revive the sputtering economy. “Those techniques include buying vast amounts of longer-term Treasury bonds, mortgage-backed securities issued by government-sponsored companies like Fannie Mae and Freddie Mac and commercial debt issued by private companies and consumer lenders.” (NY Times, Web) In addition to these techniques, the reserve helped in JPMorgan's merger with Bear Stearns. While the Federal Reserve has traditionally been an extremely secretive government entity, recent times have seen an increasing level of public interest and visibility. Chairmen Ben Bernake was featured on a recent episode of 60 Minutes and he has become more well-known that perhaps any previous reserve chairman. This is attributed to the unheralded power the reserve has gained in the wake of the financial crisis, which has brought with it increasing levels of scrutiny from government factions. Lately, Republicans have cast the Federal Reserve as an extension of the liberal 'big government' agenda, and have called for a reduction of its power. Indeed, Ron Paul has famously called for the abolishment of the reserve and was successful in passing a bill to audit the entity. Conversely, Democrats accuse the Fed of caving in to the demands of big business, and handing out bailouts without enough oversight and purpose. Currently Democrats are moving to include all regulatory reforms under the reserve, while Republicans continue to call for a gradual scale back. (NYT, Web) The Fed's most recent actions have been take slightly raise interest rates. Due to the recession, this is the first time rates have been raises in over a year and should serve as a signal to bank that the extraordinarily cheap supply of funds is coming to an end. At this point the Fed must attempt to regain some of the capital it gave away during the recession, and will gradually increase rates over the upcoming two years. Conclusion In conclusion, this essay has considered the Federal Reserve in regards to history, function, and structure. The essay has examined the important role of the Federal Open Market Committee (FMOC). It has also considered my personal perspective on the Federal Reserve and the various things I learned throughout my research. These varying aspects of understanding work together to present comprehensive portrait of the Federal Reserve’s function and monetary policy, indicating the important role this institution place in contemporary American life. References Chandler, Lester V. (1971) American Monetary Policy, 1928–41. New York: Deshaerd. Johnson, Simon. 'Bernake's Reappointment a Colossal Failure.' Hufftington Post. http://www.huffingtonpost.com/simon-johnson/bernankes-reappointment- a_b_441241.html, Feb. 2010 New York Times 'Time's Topics: Federal Reserves System.' http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserv e_system/index.html?scp=1-spot&sq=federal%20reserve&st=cse, Feb. 2010 Wells, Donald R. (2010) The Federal Reserve System: A History. New York: Penguin. Read More