The Functions of The Central Bank Essay

Federal Reserve System, commonly referred to as Fed, was established in 1913. This was after American congress passed the Federal Reserve Act in December the same year, establishing a new set of institutions which were meant to govern the relationship between banks, the government, and the production of money (Broz 1997 p. 1). The Federal Reserve System divides the nation in 12 districts, each with its own federal reserve bank (Boyes & Melvin, 2006). Overall administrative structure of the system consists of: Board of Governors. The board is headed by a chairman who is appointed by the president to a four year term (Boyes & Melvin, 2006). The chairman serves as a leader and also as a spokesperson for

Along with moral suasion, persuasion to get consumers to buy, and open market operations, the buying and selling of government securities in financial markets, the easy money policy can only help supply-side economics in it's route to ending a recession and gaining economic stability. All of these policies combined, supply-side, easy money policy, open market operation, and moral persuasion, can all have an impact on important issues. Some of these issues are employment, international trade, and inflation.

The Federal Reserve is the single entity in control of the monetary policy of the United State of America. Monetary policy is the process that the Federal Reserve takes in order to control the supply of money and to attempt the control the direction of interest rates. The reason for doing these actions is in attempt to control the country’s inflation and employment rates, which are the biggest indicators and factors of a healthy economy.

For this assignment I picked “the role of the Federal Reserve” a mere recital of the economic policies of government all over the world is calculated to cause any serious student of economics to throw up his hands in despair (pg, 74). The Federal Reserve is now in the business of enforcing the United States government’s drug laws, even if that means making a mockery of both state governments’ right to set their drug policies and the Fed’s governing statutes. A Federal Reserve official who played a key role in the government 's response to the 2008 financial crisis says the government should do more to prevent a repeat of that crisis and should consider whether the nation 's biggest banks need to be broken up. Neel Kashkari says he believes the most major banks still continue to pose a "significant, ongoing" economic risk. The next ten years will see an explosion of government debt and an implosion of government’s ability to fulfill its promises. Any economic or investment model based on past performance under previous economic conditions will be worthless just as useless as the Federal Reserve’s models.

There are also many economists who would agree with the claim that zero inflation is the optimal rate of inflation. This claim employs

Inflation is a general increase in the prices of all goods and services. Inflation occurs when the average level of prices in the economy increases over time. Even as overall prices are increasing, particular relative prices will change. The US Federal Reserve attempts to control and reduce inflation. Central banks focus is on strictly controlling inflation, protecting financial assets, and keeping labor markets strictly in check. Central Banks hold inflation more important than unemployment. Central Banks believe the only long-run impact of monetary policy is on the rate of inflation. They believe free-market forces in the real economy determine real output, employment, and productivity. To attain the targeted inflation rate, central banks influence credit creation and hence spending by frequently adjusting interest rates.

When economists think of monetary policy implementation they primarily focus on instruments, operating targets, intermediate targets, and policy goals. Instruments are the variables directly controlled by the central bank(Flandreau, 2007). These contain, an interest rate charged on reserves borrowed from the central bank, the reserve requirement ratios that govern the level of reserves banks must hold against their deposit liabilities, and the composition of the central bank’s own balance sheet. The instruments of policy are employed to accomplish a

The Federal Reserve was established as the Central bank of the United States in late 1913. Commonly referred to as “the Fed,” it is responsible for managing currency, money supply, and interest rates (Lecture, 10/6). While the bank is given much autonomy over its actions, it is not independent from the US government in that the legislature is responsible for allowing the Federal Reserve to act freely, and elected officials appoint central bankers. These are two primary mechanisms for keeping the Fed in check, insuring that it is acting in the nation’s best interest (O, 286). Countries with central banks that are independent from their governments tend

United States Federal Reserve system, also known as Federal Reserve or simply “Fed” is the United States central banking system. The Federal Reserve took inception in 1913, after the adoption of the Federal Reserve Act. The United States Congress has mandated three macroeconomic objectives to the Federal Reserve. These are minimum levels of unemployment, prices stability and keeping in check the rates of interests. Over the years, the role of Federal Reserve has expanded. It now formulates the country’s monetary policies, conducts supervision and regulation of the banking institutions, maintenance of the financial

One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a

It widely recognized that the monetary policy within a country should be primarily concerned with the pursuit of price stability. However, it is still not clear how this objective can be achieved most effectively. This debate remains unsettled, but an increasing number of countries have adopted inflation targeting as their monetary policy framework. (Dr E J van der Merwe, 2002) This topic of Inflation targeting is a subject which immediately conjures different perceptions from different people. Many feel that low inflation should be a main aim of monetary policy, while others (such as trade union activists) believe that a higher growth rate to stimulate jobs should be the main concern.

Monetary Policy, in the United States, is the process by which the Federal Reserve controls the money supply to promote economic growth and stability. It is based on the relationship between interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of monetary policy tools to control one or both of these.

“All parenting manuals tell parents to maintain credibility and to set fair and firm rules. Most parents attempt to do so. But as all, or at least most, parents know, sometimes exceptions are necessary. Not all contingencies can be planned for.” Analogous to that, as the author, David Colander, points out is that policies can be created but there can be exceptions to any policy. To begin with, let’s consider the problem that arises from the fact that there is no oversight in the Federal Reserve. In other words, the Fed can do what it wants, i.e. increase or decrease the money supply, because of the discretion it has; almost like saying that police officers have no guidelines to follow and can do whatever they want with all the power their given. Second, the problem that arises out of the fact that the Fed assumes there is only one interest rate; however, there are various different types of interest rates. So this becomes a problem in the short-run but not necessarily in the long run, after the interest rates have averaged out. This means that consumer borrowing (or when banks lend money) they’ll do so differently because of the different interest rates that do exist. Third, exists with what I mentioned about the short-term and long-term effects; essentially, inflation,

The Economy is the backbone to society. There are many factors that operate in, and govern our society’s economical structure. Factors such as scarcity and choice, opportunity cost, marginal analysis, microeconomics, macroeconomics, factors of production, production possibilities, law of increasing opportunity cost, economic systems, circular flow model, money, and economic costs and profits all contribute to what is known as the economy. These properties as well as a few others, work together to influence the economy. Microeconomics and Macroeconomics are two major components. Both of these are broken down into several different components that dictate societal norms and views.

They would argue that direct interest rate changes could be used to control aggregate demand. Whereas, Monetarism does not believe that government should intervene by managing the level of aggregate demand, they rather prefer the use of monetary policy to achieve a long-run view of price stability.