The Federal Reserve: structure, function, and economic role

¶ … monetary policy implemented in the United States in the last five years by the Federal Reserve System

The Federal Reserve has been pursuing an aggressively expansive monetary policy since the 2007 credit crisis. "Each month the Fed, through its Federal Open Market Committee (FOMC), targets a specific level for the federal funds rate. This rate directly influences other short-term interest rates, such as deposits, bank loans, credit card interest rates, and adjustable-rate mortgages. By lowering the Fed Funds rate so dramatically, the Fed hopes to jump-start the economy in one swift and decisive move by re-instilling confidence lost during the recent 2007 Banking Liquidity Crisis" (Amadeo 2009).

The current Federal Reserve interest rate is between zero and .25%. It was lowered by 1/2 point on December 17, 2008, the 10th rate cut in a little over a year, beginning with a 1/2 point cut on September 18, 2007 (Amadeo 2009). The steady rate of reduction seems necessary, given the fact that the American economy recently faced one of the most alarming challenges to its prosperity since the Great Depression. Although the American economy recently showed a small, positive sign of growth, the recovery is still in its embryonic stages. Continued low interest rates seem wise. Furthermore, adjustable rate mortgages and high credit card interest rates have been cited as two of the primary reasons for the wave of bankruptcies and foreclosures.

It is easy to forget that in 2006, the primary concern of the Federal Reserve was inflation, given the sharp spike in energy prices. In 2006, the Federal Open Market Committee announced in a press release that it was raising its target for the federal funds rate to 4-3/4%, specifically warning of the dire threat posed by inflation. However, this only occurred after many years of historically low interest rates, designed to stimulate the American economy after the recession of 2001. The Fed's low rates, critics contend, were one of the primary reasons for the housing bubble and bust. With the benefit of hindsight, they state that the Fed should have never have allowed interest rates to sink so low, and should have raised rates to more normative levels far sooner than it did. This would have curtailed the American consumer's addiction to credit and stifled the spiraling housing bubble. But the Fed alone is not to blame: the Securities and Exchange Commission (SCC) and regulators did not exercise appropriate watchfulness over the complicated financial instruments that also enabled the banking crisis to become a global event. Still, given the Fed's critical role in governing interest rates, it must bear a great deal of responsibility for the financial debacle from which the nation is still attempting to extricate itself.