The Federal Reserve System
The Federal Reserve System was established in 1913 with the goal of providing the nation with a more flexible, safe, and stable financial and monetary system. Its functions in the economy and banking system have grown over time. Its primary tasks include banking supervision, monetary policy, and financial services. It is also made up of three major components of the Federal Reserve System: Federal Reserve Banks (Reserve Banks), the Federal Reserve Board of Governors (Board of Governors), and the Federal Open Market Committee (FOMC), all of which work together to achieve the goals outlined in the constitution (Federal Reserve System publication, 2015).
Board of Governors
It is consists of seven governors who are appointed by the president with the approval of the Senate. The responsibilities of these governors include guiding monetary policy action, analyzing international and domestic financial and economic condition. Besides, it leads the committees tasked with studying current issues such as electronic commerce and banking laws. It also exercises broad supervisory control over financial services industry, oversees the country's payment system and administering some consumer protection regulation (Federal Reserve Education.org, 2012). The most important role of the board is taking part in the FOMC, that carry out nation's monetary policy. It also oversees the operation of the Reserve Banks, for instance, approving major appointments such as presidents and board of directors.
Federal Reserve Banks
It is made up of twelve Federal Banks and twenty four branches. It is the operating arm of the central bank. Every branch serves a particular of the country, only three of them have offices outside their district and they help in providing services to the public and the depository institutions. The Reserve Bank serves the U.S. Treasury, the banks, and indirectly members of the public (Federal Reserve Education.org, 2012). The Reserve Bank is often termed as a "banker's bank", it keeps currency notes and coins, besides it prepares checks and the electronic payment system. It also supervises the operation of commercial banks in various regions. The Reserve bank is the bank of the U.S. hence its handle payment made by treasury, sell government securities and assisting in the treasury cash management and investment activities. It plays an important role in bringing wide economic perspectives to the national policymaking arena.
Federal Open Market Committee (FOMC)
The FOMC is the monetary policy making body of the Federal Reserve. It is tasked with the devising of the policy set up to support economic growth and stable prices. Its role is generally to manage the money supply in and out of the country. Board of Governors, the president of the Fed Bank of New York and the other presidents of the four Reserve Banks serve on rotational basis have the right to vote on the FOMC. The chairman of the FOMC is the chairman of the board of directors (Grey, 2002). The meet eight times in a year and they discuss the overall outlook of the U.S. monetary policy and economic options.
The Roles of the Federal Reserve
Monetary Policy
In carrying out monetary strategy, the Fed is steered by three main policy objectives;
- Price stability
- Maximum or full employment
- Monitor long-term interest rates
The Fed adds toward the achievement of the goals through its capability to manipulate the availability and the cost of credit and money in the economy and the overall financial conditions. The main instruments used in monetary policy include open market operations, which affect permanent and temporary federal funds rate sale of the agency and the U.S. Government securities, since each and every sale or purchase of the securities affects the amount of the federal funds rate. The second is the discount rates, is the interest rate at which commercial banks and the rest of the depository institutions pay whenever they borrow funds from the reserve bank (Board of Governors of the Federal Reserve System, 2016). Reserve requirements is the third instrument, it refers to the percentage of the deposits that the commercial banks and the other depository institutions have to hold as reserves instead of utilizing such funds for investments or loans.
Financial System Stability
Promotion of the financial strength has been recognized as among the objectives of the central banks. Creation of the Federal Reserve was aggravated as part of the reaction to the succession of the banking panics that was witnessed in 19th and 20th centuries. The "Dodd-Frank Act" of 2010 provided the Federal Reserve new responsibilities and powers for financial stability. The Fed designed tools which are aimed at promoting financial stability (Federal Reserve System publication, 2015). These tools can be categorized into the provision of liquidity, enhancing the resilience of the main financial institutions, and addressing structural vulnerabilities.
Whenever there is financial crisis, Fed helps in cushioning the impact on the financial market by providing liquidity issues through discount window lending or open market operations. Also to prevent financial crises, the Fed, promote resilience of large banks with the programs of macroprudential regulation and supervision. Working together with other members of the FSOC, Fed, decrease the threat caused by some vulnerabilities such as "shadow banking" systems.
Supervision and Regulation
The Fed has critical regulatory and supervisory responsibilities. With supervision, the Fed, is charged with the responsibility of inspecting, examining and monitoring some certain institutions so as to assess their overall condition. It also helps these institutions to have sound and safe and ensure full compliance with the relevant regulations and laws (Federal Reserve Education.org, 2012). Some of the segments operating in the financial industry and are managed by Fed include state-chartered banks, bank holding companies, loan and saving institutions among others.
The BoG has the power and right to set up the rules and regulations for which state member banks and bank holding companies must operate. They issue very precise guidelines and regulations pertaining the operations, acquisitions and activities of the financial institutions. In addition, the board has the authority to make ruling regarding applications received from bank holding companies and state member banks.
Conclusion
The Federal Reserve controls all the financial and monetary activities and operations in the country. It has three main components which include Federal Reserve System, the Federal Reserve Banks (Reserve Banks), the Federal Reserve Board of Governors (Board of Governors) and the Federal Open Market Committee (FOMC). Its responsibilities fall into three main general areas which include conducting the country's monetary policy, regulating and supervising banks and other financial institutions, and finally maintain the stability of financial systems in the U.S. besides, it provides some other important financial services to the U.S. financial systems, government, and other foreign official institutions. Overseeing the nation's system of payment is another role of the Fed (Board of Governors of the Federal Reserve System, 2016).
References
Board of Governors of the Federal Reserve System. (2016, November 3). What is the purpose of the Federal Reserve System? Retrieved from www.federalreserve.gov: https://www.federalreserve.gov/faqs/about_12594.htm
Federal Reserve Education.org. (2012). The Structure and Functions of the Federal Reserve System. Retrieved from www.federalreserveeducation.org: https://www.federalreserveeducation.org/about-the-fed/structure-and-functions
Federal Reserve System publication. (2015). Roles and Responsibilities of Federal Reserve Directors. Washington: Federal Reserve System.
Grey, G. B. (2002). Federal Reserve System: Background, Analyses and Bibliography. Delhi: Nova Publishers.
