This is the interest rate that banks lend their balances on at the Federal Reserve to other banks. It exercises this control by influencing the demand for and supply of these balances through the following means: Imagine yourself in today's current economic situation, how uncomfortable you would feel with your money in the banking system without the FDIC insuring your funds. Knowing today that your account is insured and you can withdraw all of your funds if you need to is the reason the Federal Reserve is needed today.
Open market operations -- the purchase or sale of securities, primarily U.S. Treasury securities, in the open market to influence the level of balances that depository institutions hold at the Federal Reserve Banks (The Board's Publications Committee, 2005).
Reserve requirements -- requirements regarding the percentage of certain deposits that depository institutions must hold in reserve in the form of cash or in an account at a Federal Reserve Bank.
Contractual clearing balances -- an amount that a depository institu-tion agrees to hold at its Federal Reserve Bank in addition to any required reserve balance.
Discount window lending -- extensions of credit to depository in-stitutions made through the primary, secondary, or seasonal lending programs (The Board's Publications Committee, 2005).
The Fed's original and ongoing function has been to organize, standardize, and stabilize the monetary system in the United States. It set up a method that could create "liquidity" in the money supply -- in other words, make sure banks could honor withdrawals for customers. It also needed to come up with a way to create an "elastic currency," meaning it had to control inflation by making sure prices didn't climb too quickly, and it needed a way of increasing or decreasing the country's supply of currency in order to prevent inflation and recession (Obringer, 2002).
Why do we need the Federal Reserve System?
To answer this question it would be relevant to go back in time and remember why it was started in the first place. Before the Federal Reserve was created there were many different currencies in use throughout the U.S. Some of the currencies were backed by silver or gold, and others by government bonds. Some of the banks at times didn't even have enough money to cover withdrawals from their own customers.
Before the Federal Reserve was created, banks were failing, and the economy had extensive up and down swings. The confidence level Americans had in the ...
Another reason we need the Federal Reserve System is to help control inflation and recession. Inflation is not good for the country because it slows down economic growth. For example, when inflation is high, products and services cost more and people cut back on spending. They also reduce long-term spending, such as constructing homes or buildings, starting new businesses, and investing in long-term options.
This insecurity makes people cautious of spending money for fear that inflation will intensify even more and they won't be able to pay bills and repay loans. High inflation also adds additional costs to long-term interest rates.
The nation needs a money manager because money does not manage itself. Money and credit are the lifeblood of the economy; they facilitate commerce, job creation, and business growth. As our nation's money manager, the Fed implements monetary policy to manage the flow of money and credit in the economy.
If money and credit expand too rapidly, businesses cannot produce enough goods and services to keep up with increased spending. Prices may rise, causing inflation. If the flow of money and credit contracts too greatly, spending and business activity may dwindle, workers may lose their jobs, and a recession may result. As our nation's money manager, the Fed conducts monetary policy to attempt to balance these two extremes to keep prices steady, workers employed, and factories productive (Federal Reserve Bank of San Francisco, n.d.).
Federal Reserve Bank of San Francisco. (n.d.). The federal reserve system is the central bank of the United States. Retrieved May 18, 2009, from Federal Reserve Bank of San Francisco: http://www.frbsf.org/publications/federalreserve/fedinbrief/central.html
Obringer, L.A. (2002, May 02). How the fed works . Retrieved May 18, 2009, from HowStuffWorks.com: http://money.howstuffworks.com/fed2.htm
The Board's Publications Committee. (2005). The federal reserve system purposes & functions. Washington, D.C.: Board of Governors of the Federal Reserve System.
The structure of the federal reserve system . (2003, July 8). Retrieved May 18, 2009, from federalreserve.gov: http://www.federalreserve.gov/pubs/frseries/frseri.htm
Imagine yourself in today's current economic situation, how uncomfortable you would feel with your money in the banking system without the FDIC insuring your funds. Knowing today that your account is insured and you can withdraw all of your funds if you need to is the reason the Federal Reserve is needed today.
S. growth will proceed at a crawl in 2008, which will provide little comfort for the dollar" and most certainly call for intervention again by the Fed. "In some fashion the dollar will continue to decline," according to Adnan Akant, a specialist in currency at Fischer Francis Trees & Watts, money managers in New York City. For investors, Slater continues, having a weaker dollar offers choices; to wit, if you
Their basis of criticism is that it had very expansionary monetary policy in the early days that gave room for misallocation of various capital resources. This lead to various undesirable economic scenarios such as the support of a massive stock price bubble. It has been argued that even though the Federal reserve did not cause the Great depression, it mitigated it through the unnecessary contraction of the money supply
Federal Reserve System is. The Federal Reserve System The Federal Reserve serves as the central bank of the United States. It was founded by the Congress in 1913 to serve the function of provide the nation with a secure and committed monetary and financial system. Today the Federal Reserve holds the responsibilities in four areas: (1) conducting the nation's monetary policy; (2) supervising and regulating banking institutions and protecting the credit rights
The overall credit conditions have for example been severely affected by housing market and other economic trends. This has been exacerbated by energy and commodity price increases, which have affected household buying power negatively. Concomitantly, the inflation rate has remained high at nearly 3.5% for the first five months of 2008. Chairman Bernanke also noted that the trend in rising prices was likely to further increase inflation. Furthermore, oil production
Federal Reserve The current state of the United States economy is not encouraging. Even though there has been false hope about it, the chances are that it will hardly last for long. The long-term trends that are negatively impacting the economy and financial system are showing no signs of reducing. As each day passes, the economic foundations of the country continue to crumble. The debt of the country has increased and
The Federal reserve realized the big negative impact of MBS and announced a 600 billion program in November 2008 to purchase these securities and this helped to bring back some liquidity into the market. In March 2009, it added another $750 billion to bring the total to $1.25 trillion. The Fed has the power to create or print more money to increase money supply in the market and this is exactly