Arguably, the Federal Reserve System (Feds) has been in existence since the year 1913. In fact, it is the central bank of the United States. The Fed system was established for various reasons. As a matter of fact, many people in America could not lay their hope in the banking system before Feds was established. This implies that the American could not entrust their money to any banking system, meaning they had totally lost confidence. The establishment of the Federal Reserve System helped in regaining the public trust and confidence in the banking system.
The Americans had lost faith and confidence in the banking system since they could not access their money in this of need. The people had lost faith since because some of the banks closed and the public lost a lot of their savings. There are three leading roles of 12 Federal Reserve Banks that has struggled to rebuild the confidence of the public in monetary and banking system. One of the reasons is to provide saver and stable banking system. It was designed to be a decentralized central bank to the public and other banks. The three main roles of Fed are to control the supply of money in the economy through monetary policy. In this case, monetary policy employs various measures to achieve its goals, which include open market committee, as well as buying and selling of government securities (Wells, 2004).
The committee makes decisions on the supply of money in the economy. The second role of Fed is to provide financial services. In this case, the Fed provides financial services to banks just the same way banks serve the public. The third goal of Fed is to supervise banks and bank holding companies. This role is to ensure that banks in the United States function according to stated rules and regulations (Osgood, “The Fed Today”). Government agencies work together in ensuring that banks work within the law and rules. In the past, the public had lost confidence in banking and monetary system since there were many currencies, and each bank operated on its own. This main function is intended to hand round the main goal of the Fed system, which is to achieve a stable economy characterized by higher production, steady growth, as well as overall stable prices (Grey, 2002).
The Federal Reserve is referred as the banker’s bank. This is because Fed does the same functions that other banks do, especially to its customers. In this case, the Feds are in a position to lend loans to other banks at a certain rate of interest. Hence, other banks can borrow money from the regional Feds, just like any other customer would do. Reserve banks are banker’s bank because they provide cash to banks so as to meet their short-term requirements that may arise due to seasonal deposits and withdrawals (Wells, 2004). This system has enabled banks to increase the confidence of the public in them, since banks are in a point to gather the needs of its customers. Hence, Fed is called the banker’s bank because it acts as a fiscal agent for the United states, as well as maintaining U.S treasury accounts. In general perspective, it is the agent that deals with payment system of the nation (Osgood, “The Fed Today”).
Monetary policy is a very crucial tool that is used in an economy to stabilize various economic determinants. Certainly, the Federal Open market Committee has a role to play in conducting monetary policy. Their main role is to establish monetary policy to be used in the United States. The committee influences the availability of credit and money through decision making. In fact, the committees have the credibility to see the sign both deflationary and inflationary pressures, and act in various ways to correct the imbalance (Grey, 2002). The members of the board and the Feds regional presidents formulate the monetary policy. As a matter of fact, there are various monetary policy options that can be used in an economy in case of an imbalance. Therefore, FOMC discusses and chooses the monetary policy option to apply. The FOMC role in conducting monetary policy is influence interest rate, money supply, and discount rate (Wells, 2004).
Federal reserve may decide to decrease the monetary policy because of the increase in prices. Probably, when the supply of money is high in the economy then it will drive the economy into inflation. Therefore, the decreasing of money supply is a strategy used to reduce inflation in the economy (Osgood, “The Fed Today”). Moreover, Fed reduces the money supply with an intention of influencing the rate of investor and consumer spending. Economically, a decline in the supply of money causes a decrease in spending and investment. When the supply of money increases more than production there is a tendency of prices to increase presently. Hence, decreasing money supply stabilize prices. In general perspective, the roles and functions of Fed increased confidence and hope among Americans on the banking system.
References
Grey, G. (2002). The Federal System: background, Analysis and Bibliography. New York:
Nova Publishers
Osgood, C. The Fed Today. History, Structure, Monetary Policy, Banking Supervision, Financial
Service and More. The Fed Today Video. Retrieved on 4.11.2012 from
http://www.federalreserveeducation.org/resources/fedtoday/fedtodayBrochure.pdf
Wells, D. (2004). The Federal Reserve Syatem: A History. London: Wiley
