Federal Reserve System More Commonly Term Paper

  • Length: 7 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #91591570

Excerpt from Term Paper :

" (Structure of the Federal Reserve System)

The 12 Federal Reserve Banks extend banking service to the depository institutions and also to the federal government. To the financial institutions it takes the responsibility of maintaining reserve and clearing out accounts and entails various payment services incorporating checks, electronically transferring funds and circulating and receiving coins and currency notes. As the banker of the Federal Government they function as fiscal agents. They maintain the Treasury Department's transaction account; they pay treasury checks; enable to process electronic payments and issue transfer and redeem U.S. government securities. (Reserve Bank Services)

The functions of Federal Reserve start with the formulation of the Monetary Policy in accordance with the needs of the national economy. The Federal Reserve System provides three basic tools for conducting the monetary policy such as open market operations, discount rate and reserve requirements. The Open Market Operations is used as the most forcible and frequently applied device to affect the amount of money and credit which is being available in the economy that indicates basically to the purchase and sale of Treasury securities in the open market. The Federal Open Market Committee is basically liable for the carrying forward the open market operations. The net availability of money and credit is tailored by Federal Reserve System through varying discount rate that implies the interest rate that the Reserve Bank charge over the depository financial institution for short-term loans of reserves. The Board of Governors fixes the discount rate, on the basis of the recommendation of the boards of directors of the twelve Reserve banks. (How the Fed works)

The third tool available with the Fed is to set the quantum of Reserve Requirements. The Board of Governors may directly influence the availability of money and credit by varying the percentage of reserves which banks must have in hold against the deposits. One of the basic objectives behind creation of the Federal Reserve was to offer the nation a safe and effective mode of transferring funds and securities by means of the financial system. The Federal Reserve is also called as the Bankers bank entailing services for financial institutions in a similar manner that commercial banks would be able to serve their customers. (How the Fed works)

The Federal Reserve extends the payments services to the U.S. Government. As the Banker's bank the Federal Reserve issues coins and currencies, entail check clearing facilities to the financial institutions, transfer funds and securities by electronic means on the nationwide FedWire network, entail the automated clearing house services which is the electronic deposit and debt of funds. With provision of such financial services, the Reserve Banks foster the smooth operation of the financial system and the efficient levels and technological progress of the payment system. Its role as the banker to U.S. government spans from maintenance of the Treasury Funds account and facilitate clearing of checks drawn on that account. It facilitates marketing and redemption of government securities and savings bonds. It also makes possible the nationwide auctions of Treasury securities.

The Fed also takes the responsibility of supervision and regulation of banking organizations in the nation. It collaboratively functions with federal and state financial authorities to supervise and regulate the U.S. banking system. The primary goal of Federal Reserve is to function in collaboration with federal and state financial authorities to supervise and regulate the U.S. banking system so as to make certain the safety and soundness of the banking system, to safeguard consumers in credit activities and to enforce upon the banking laws and rules. The activities of the system in pursuit of such role involves "on-site examination of state member banks, safety and soundness, consumer, information systems, and fiduciary examinations, on-site inspections of banking holding companies, applications processing and assessing of financial institutions." The Federal Reserve System has attained a partnership between government and private-sector representation. Irrespective of the fact that the System has a complex structure and several responsibilities, it was established for fulfillment of an ultimate objective of entailing the nation with a safer and flexible monetary and financial system which would provide stability. (How the Fed works)

The primary objective of the Federal Reserve System, the central bank of United States is to control the supply of money and credit to the economy. The board of governors, the major policy making body of the system, performs a crucial role in accomplishing such objectives. The Board functions with seven members, 2 of them functioning as Chairman and Vice-chairman. Each of the governors is appointed for a period of fourteen-years. The appointments to the seats of chairman and vice-chairman are for four years duration. The terms of Federal Reserve Governors are long enough to safeguard the members from the political pressures and promote independent decisions. The liability of regulating the money supply of the nation necessitates the Federal Reserve to have an impact on the amount of reserve funds available to the banks and thereby upon the short-term interest rates. (Johnson, Federal Reserve System)

The Fed can buy U.S. government securities from financial institutions by just generating 'funds' or credits on their balance sheets in return for the securities. The banks have new forms of liquid reserves on their books immediately, equivalent to the extent that such securities are being bought directly from banks. While the non-bank financial institutions deposit their proceeds from the sales of securities, banks will visualize their reserves enhance even further. The banks over flooded with additional reserves, they, for a short period attempt to lend such funds to other banks overnight with a view to earning interest. The enhanced supply of reserve comparatively to demand in the money markets pushes down the overnight interest rates. Such a decrease in the cost of credit to banks enhances the profitability of new loans to businesses and individuals and offers strengthened incentives for banks to increase the amount of credit to the economy. (Johnson, Federal Reserve System)

The Federal Reserve brought out innumerable papers, reports during a particular year those are considered significant to the oversight work of Congress. An Annual Report of activities which incorporate the minutes of FOMC meetings is published annually by the Board of Governors, where in the Board annually in agreement with its consumer regulations. The Federal Reserve publishes reports and surveys on several subjects to illustrate an annual survey of bank fees and services and a report on the profitability relating with credit card operations. Such statutory needs for semi-annual monetary policy reporting and various other policy reports would have been discontinued by the enactments of Federal Reports Eliminations and Sunset (PL-104-66). However, the enactments in PL 106-109 of 2000 reestablished such requirements. (Structure and Functions of the Federal Reserve System)

References

Federal Reserve Bank of Minneapolis: Historical Overview. Retrieved at http://minneapolisfed.org/info/mpls/history/overview.cfm. Accessed 11 November, 2005

Ferguson, Robert. W. The Evolution of Central Banking in the United States. Retrieved at http://www.federalreserve.gov/boarddocs/speeches/2005/20050427/default.htm. Accessed 11 November, 2005

Frequently asked Questions: Federal Reserve System. Retrieved at http://www.richmondfed.org/faqs/index.cfm?faq=Federal%20Reserve%20System. Accessed 11 November, 2005

How the Fed works. Retrieved at http://www.clevelandfed.org/about/threefrs.htm. Accessed 11 November, 2005

Johnson, Manuel H. Federal Reserve System. Retrieved at http://www.econlib.org/library/Enc/FederalReserveSystem.html. Accessed 12 November, 2005

Reserve Bank Services. Retrieved at http://www.federalreserve.gov/pf/pdf/frspf7.pdf. Accessed 12 November, 2005

Smale, Pauline. Structure and Functions of the Federal Reserve System. CRS Report for Congress. Retrieved at http://www.fas.org/sgp/crs/misc/RS20826.pdf. Accessed 12 November, 2005

Structure of the Federal Reserve System. Retrieved at http://www.ny.frb.org/education/fed/structure.html. Accessed 12 November, 2005

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