Federal Reserve

The Federal Reserve System (FRS) is the United States’ central bank. The Federal Reserve is undoubtedly the most influential financial institution in the world. It was established to offer a safe, flexible, and stable monetary and financial system for the nation. The board of the Fed consists of seven members. In addition, each of the 12 Federal Reserve banks has its own president who represents a distinct area.

A central bank has privileged control over a country’s or group’s money and credit. Modern central banks establish monetary policy and regulate member banks. The Fed has 12 regional Reserve Banks, each accountable for a U.S. region.

Particular Considerations

The Fed’s primary source of revenue is interest on a variety of U.S. government securities acquired through open market operations (OMO). Other sources of income include interest on foreign currency investments, interest on loans to depository institutions, and fees for services supplied to these institutions, such as check clearing and fund transfers. The Fed transfers the remainder of its earnings to the U.S. Treasury after deducting its expenses.

The Federal Reserve’s payments system, generally referred to as the Fedwire, transfers trillions of dollars daily between U.S. banks. Transactions are settled on the same day. 5 In the aftermath of the 2008 financial crisis, the Fed has paid more attention to the risk posed by the time lag between early-morning payments and settlement and reconciliation. The Fed is pressuring large financial institutions to implement real-time monitoring of payments and credit risk, which was previously only available at the end of the day.

Components of the Federal Reserve System

1. The entire Federal Reserve System was directed by the seven members of the board of governors. Their responsibilities include overseeing monetary policy and determining the discount rate and reserve requirement for member banks.
2. The twelve regional Federal Reserve Banks collaborate with the board to govern and execute strategy for the nation’s commercial banks.
3. FOMC, or the Federal Open Market Committee, oversees open market activities. Members include the seven board members, the president of the Federal Reserve Bank of New York, and four of the remaining 11 presidents of regional banks. Therefore, the FOMC meets eight times annually.

Responsibility of the Federal Reserve

Here, we shall examine the four functions of the Federal Reserve System in detail:

1. Controls Inflation

This function of controlling inflation is evident. The Federal Reserve regulates inflation and promotes optimum well-being. Additionally, it ensures that interest rates are appropriate over time. The Fed sets a 2 percent inflation objective for the core inflation rate, which excludes volatile food and fuel prices.

2. Oversees the Financial System

The Fed is a system of 12 Federal Reserve banks supervised by the Board of Governors, and these 12 institutions both monitor and serve as banks for the commercial banks in their region. Simply said, the Fed oversees and regulates the nation’s largest banks in order to protect clients. In addition, Reserve banks conduct essential research on financial matters.

3. Maintains the Financial System’s Stability

The 2008 financial crisis revealed that individual bank regulations were insufficient. The financial system had become so interwoven that the Fed and other regulators anticipated taking a comprehensive look at it. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 strengthened the Federal Reserve’s power to maintain stability.

4. Offers financial services

The Fed is characterised as the “banker’s bank” because to the fact that each Reserve bank keeps cash, processes checks, and issues credits to its members to satisfy reserve requirements. The discount rate, which is somewhat higher than the Fed’s financing rate, is levied to banks.

Organizational structure of the Federal Reserve System (FRS)

The Board of Governors is composed of seven individuals. The President nominates and the U.S. Senate approves these individuals. Each governor’s term is limited to fourteen years. Their appointments are staggered by two years in order to limit the president’s authority. The law also mandates that appointments reflect all major economic sectors in the United States.

As of June 7, 2022, only one board seat remains vacant.

Fed Governors (as of June 2022)

• President:  Jerome H. Powell
• Vice President: Lael Brainard
• Board Member:  Michelle W. Bowman
• Board Member: Lisa D. Cook
• Board Member: Philip N. Jefferson
• Board Member: Christopher J. Waller
• Board Member: Seat Is Presently Vacant

Freedom of the Federal Reserve System (FRS)

Independence of the central bank relates to the question of whether the monetary policy overseers should be totally detached from the sphere of government. Those in support of independence understand the role of politics in advancing monetary policy, which can facilitate re-election in the short term but inflict long-term economic damage in the long run. Critics assert that the central bank and government’s economic strategy must be carefully linked, and that central banks must be subject to regulatory monitoring.

The Fed is also considered independent because the president or any other government official is not required to approve its decisions. However, it is still subject to congressional inspection and must operate within the economic and fiscal policy objectives of the government.

Federal Open Market Committee Meeting

The Federal Open Market Committee (FOMC) meeting is a regular session held by members of the Federal Open Market Committee, a division of the Federal Reserve that determines U.S. monetary policy.

After deliberating on short-term monetary policy, the FOMC will establish a federal funds rate target that they feel will achieve their objectives.

Federal Bank balance

The Fed’s balance sheet will be a weekly-updated financial statement, according to Zhang. It indicates what the U.S. central bank possesses and owes.

A household’s assets section may include equities, bonds, and a home. Treasury debt and mortgage-backed securities comprise the Federal Reserve’s holdings. Similar to a household’s debts or mortgage, the Fed’s balance sheet includes liabilities: U.S. paper currency and money held in Fed accounts by commercial banks. According to the most recent update provided on Thursday, the balance sheet of the central bank is just under $9 trillion.

Conclusion

In conclusion, we may state that the Federal Reserve employs a financial strategy to monitor inflation, expand businesses, and maintain interest rate equilibrium. The Federal Reserve supervises the nation’s largest banks and provides the federal government with financial services. It also promotes the life of the economic system.