The Pros and Cons of the Federal Reserve
The Federal Reserve (the Fed) refers to a central banking system in the USA. This system was founded on 23 December 1913. It’s creation was leaggly supported by the Federal Reserve Act enactment. This Reserve was founded to deal with the severe financial problems that the United States economy faced. A good example of the problems that led to the eventual foundation of the Federal Reserve included the financial panic that took place in 1907. In course of time, the overall duties of the Federal Reserve changed. It took up more roles and changed it’s structure as well as its general functions working as a central banking system. One crucial factor that led to some of these adverse changes in structural and functional characteristics includes the Great Depression (Paul, the Wall Street Journal).
Fundamental Objectives for Monetary Policy
The Congress established three fundamental objectives for the monetary policy in the Federal Reserve Act. These crucial objectives include stable prices, mild long-range interest rates and maximum employment opportunities within the United States of America. The dual mandate of this Federal Reserve entirely lies in providing maximum employment and stable prices. Within the past decades, the general function of the Federal Reserve encountered an immense expansion. One of its additional functions includes carrying out of the monetary policy of the United States of America. Another basic role that the Reserve possesses includes keeping the financial stability of the state at the same level with the rising costs of living. Next, the Reserve works on controlling and adjusting banking institutions. Moreover, it provides financial services to depository agencies, external official institutions and the government of the United States.
The Federal Reserve also carries out researches in the United States economy and produces many publications. An example of a publication made by the Reserve includes the Beige Book (Pozen 56).
Structurally, the Fed consists of a Board of Governors appointed by the Head of State. Another name for the Board of Governors includes the Federal Reserve Board. Other parties appointed presidentially include twelve regional Fed banks situated in big cities of the United States of America. In addition, other presidentially appointed bodies in the reserve include the Federal Open Market Committee (FOMC), several American member banks and different advisory councils.
A fundamental committee in the Federal Reserve includes the Federal Open Market Committee. It is a crucial body in this reserve since it sets monetary policy. Moreover, it comprises of all the seven Board of Governors members as well as the twelve presidents of the regional banks. Out of twelve residents of the regional bank, only five of them are legible to vote at a particular time. These include the president of the New York Fed and four other presidents. These four rotate through one-year terms each.
There exist both public and private components in the Federal Reserve System. The foundation of this reserve was encouraged with a crucial aim of serving both private bankers and the public. Therefore, the structural characteristics of the Federal Reserve stood out as unique as compared to other central banks within the state. Another factor that tends to emphasize the unique nature of this bank includes the fact that its currency is made by the US Department of the Treasury (Wells 76).
The Board of Governors defines the Reserve as an independent body due to the fact that the Fed makes its monetary policy resolutions free of the approval of the president. Furthermore, these monetary policy resolutions occur without any further approval from members of the legislative or executive branches of the government. Next, it receives no appropriated funds from the Congress. Finally, all the terms of the participants of the Board of Governors span many congressional and presidential terms.
All the members of the Federal Reserve Board get appointed by the Head of the State and affirmed by the senate. These also include both the chairperson and vice chairperson of the Board of Governors. Although this occurs as a privately owned body, the government still possesses a hand in its management. For instance, the government possesses the duty of establishing the salaries of the high-level members of the reserve (Broz 34).
The reserve possesses numerous advantages especially to the economy of the USA. Several advantages were described in the above section of this essay. However, it is vital to look into these merits in a detailed manner. This enhances the better understanding of the reserve and its characteristics.
The first benefit of this reserve includes the fact that it provides maximum employment opportunities to the state. Citizens of the United States of America possess the ability to access employment through the Federal Reserve System. In addition, the reserve offers highly payed jobs for the high-ranked employees. Moreover, most of these high-level members have their salaries determined and set by the government. Some of the members that benefit in this manner include the bank presidents and all the participants of the Board of Governors. The readily available job opportunities also largely raise the standards of living of the employees. High salaries paid to the members also increase the efficiency of service provision by this privately owned bank.
The Federal Reserve also appears as a fundamental body since it ensures stable prices in the state. This helps in maintaining the financial stability of the state (Gup 24).
Another vital role of the reserve that is fundamental to the state includes the fact that it loans money to banks at a 0% interest rate. Therefore, this enables the rapid growth of the banks and other institutions. As stated earlier, this bank works on controlling and adjusting banking institutions. In addition to that, it offers financial services to the depository institutions. Furthermore, it offers financial services to other foreign official agencies and the entire government of the USA. All these services help in improving the economic state of the nation. Eventually, the living standards of all the citizens are improved. This occurs since they possess the capability of accessing loans at a 0% interest rate. This offer of the Federal Reserve System appears to be one of its most fundamental advantages.
The Reserve is a private bank that should have only the private service. On the contrary, it serves both in private and public sectors. This breaks the boundaries of its functional boarders thus, enabling a range of service provision (Virginia 49).
To that effect, the Federal Reserve appears as a fundamental element of the growth of the state’s economy. It carries out duties that occur crucial to the economic state of the nation. In addition, it serves both the private and public sectors. Thus, it does not base its functions and services on the basis of the fact that it is as a privately owned Bank. The Federal Reserve Board views this institution as a more fundamental one than all the other government elected central banks, since its functional benefits tend to surpass those of the government elected central banks.
All the above-mentioned merits of the Federal Reserve prove it crucial nature to the economy of the United States of America. It is as a financial body that the state requires in order to fight problems of unemployment and high interest rates charged on loans by other banks. However, as much as the Reserve appears as a fundamental entity to the state, it also possesses several demerits.
First, one of the main aims for which this bank was established included avoiding financial panics within the state. The bank intended to carry out this responsibility by evening- out the business cycles. Since the Fed encountered over-leverages and many bets, it failed in this duty. This occurred since the Reserve is the only central bank offering such a kind of services. Thus, most of its roles and functions end up unfulfilled due to this.
The bank turned out to be immensely vulnerable to failure since it offers more credits to its customers than the returns it gets. Due to its unique nature, the Reserve poorly plays its role in enhancing competition in the banking sector. The Fed Board states that this bank offers loans with a zero percent interest rate. Such a policy kills the effective competition that should exist amongst different banks. The wealth and power of the central bank appears to be at a rather minimal rate. This occurs since it offers high loans with fewer returns from its debtors. It formulates its banking policies independently, not considering its own political power. This places the Reserve in a risky financial position.
Other disadvantages of the Federal Reserve System tend to influence directly the citizens of the state. This occurs since the bank controls the monetary policy. In addition to that, it possesses the role of printing all the money within the state. This appears risky to the citizens since the Fed possesses the power over the government and country’s economy. Thus, it can destroy the currencies in order to suit its own benefits. Eventually, this may bring raise to a wave of inflation that may distort any semblance of the purchasing power.
In addition, the existing corruption amongst the members and employees of the Federal Reserve can lead to a drastic collapse of the state’s economic. This can occur since the members of the Federal Reserve serve in the bank for a period of fourteen years. This period is long enough to destroy the economic state of any country or state.
The government of the United States of America pays less attention to managing policies of the Federal Reserve. This occurs since the state avoids destructions in the functioning of the Reserve. Moreover, the bank possesses a fundamental responsibility of lowering inflation within the state. In its efforts to carry out this role, the Reserve tends to raise the interest rates. However, this act of raising the interests to reduce the inflation rates faces detest from the Congress. The Congress finds this step as a politically unpopular move. In addition, some economists claim that the trend of raising interest rates in the event of inflation might pose a risk to the economy of the state.
All the alterations, carried out by the Reserve, have a long-term effects on the economy of the state. Furthermore, the bank portrays a monopoly structure in the banking industry. Thus, it establishes its own lending rates instead of letting the market affect the rates. This further lowers the competition among banks in the banking sector.
Policy makers in the Federal Reserve lack the required up to-date information to enable them work on the current situation in the economy of the state.
The Congress formed this reserve. Thus, the Congress possesses an upper hand in making some of the crucial decisions. The government carries out little follow- ups on the trends of the reserve. Despite this, the reserve still possesses a key role in providing a more flexible, safe and stable monetary and financial system. It ensures that the inflation rates remain low throughout the year. It does this by raising interests, although the Congress views this trend as a politically unpopular move.
In conclusion, the Federal Reserve refers to a central banking system in the United States of America. It possesses some fundamental roles in maintaining a stable economy of the state. Some of its roles and responsibilities include ensuring maximum employment, moderate long- term interest rates and stable prices.
The overall functions of the reserve increased in the past decades. Some of the additional functions of the bank include carrying out the monetary policy in the state and ensuring financial stability of the state. It does this mainly by increasing the interest rates in the event of inflation. In addition, the reserve works on foreseeing any future depreciation in the economic trends of the state. Hence, it takes the necessary precautions to avoid the negative outcomes.
To summarize the pros and cons of the Federal Reserve, it occurs crucial to note that this body plays an important role in regulating the financial conditions of the state. Despite the fact that it acts as a private entity, the reserve offers financial services in both private and public sectors. Other bodies that benefit financially from the Reserve include the government of the United States and foreign investors.
However, the Fed still possesses a number of disadvantages. One of the main disadvantages includes the fact that it does not encourage competition in the banking sector. Next, given that it acts as the sole maker of monetary policy, it may pose risks on the citizens. The Reserve acts as the only bank that makes money in the state. Thus, this gives it an upper hand over the government. Moreover, the bank may use this opportunity to distort the currency in order to suit its own financial desires. Hence, as much as it works on regulating the state’s financial well-being, several measures should be taken in order to avoid the financial calamities the bank may bring.