Federal Reserve Paper

Fin/366

Introduction

In the early 1900 congress instated the Federal Reserve Act of 1913. This was a signed law by President Woodrow Wilson himself. After this bill was made a law, it began the U.S. Central Banking System. The Federal reserves was put in place to stabilize prices and the monetary system across the U.S. Prior to this bill being signed the price of products varied depending on where you were and who you were dealing with. If this bill was not put into place the U.S. could have been in a deeper hole during the Great Depression. This paper will examine the Federal reserve’s primary functions, the effects of their monetary systems, and eight different effects their monetary policy has made on the economy.

Primary Functions

The Federal Reserve serves as the U.S. central banking standard and they set the bar for other countries that wish to follow the U.S, monetary system. It is the Federal Reserve’s responsibility to stabilize the U.S. monetary system. This is done by them setting the interest rate standard, that will affect how much money can be loaned out. The Federal Reserve system is set up in five components are the Federal Reserve district banks, the Member banks, the Board of Governors, the Federal Open Market Committee (FOMC), and the Advisory committees. The Fed District Banks are responsible for running the banking system. This is carried out by clearing checks, replacing outdated money, and by providing money for loans. A member bank is a commercial bank that is associated with the Fed Reserves System. All national banks are required to be a member bank. The Board of Governors is made up of seven members and they are responsible for credit control, they can revise reserve requirements imposed on depository institutions., and they are able to control the money supply. The FOMC is made up the seven members from the Board of Governors and the five Presidents from the District Banks, they are responsible for stabilizing prices and economic growth. The Advisory Committees is made up of three different advisory groups. The Federal Advisory Council, they make recommendations about economic and banking issues. The Consumer Advisory Council, they discuss consumer issues. The Thrift Institutions Advisory Council, they offer views on issues specifically related to these institutions. When the Fed Reserve decides to change their policies, it influences financial markets, institutions and interest rates.

Effect of Federal Reserve Policy

All decisions made by the Federal Reserve System affect the U.S. economy either in a positive way or a negative way. The monetary system can either grow or decline based off the interest rate standard set by the FED’s. If interest rates are going up that can have a negative effect on the economy. That will mean that the cost to borrow money will be too high. In turn the housing and car market will crumble. People will be less inclined to make these purchases due to inflation. As interest rates rise people will start to pull money out of their accounts, which will decrease the amount of currency institutions will have on hand. Since the banks have less money in their vaults it will become harder for them to approve loans. When interest rates decrease everyone will be happy. Investor will also begin to make deposits back into accounts. The cost of loanable fund will decrease, meaning that investors will be able to take out bigger loans. People would be more inclined to take out a mortgage and a car loan because it would not be as expensive.

8 Series of Data

Conclusion

• The consumer price index for all urban consumers: all items. This market has been on the decline. Which means that interest rates must be high. When interest rates go up so does the price of everyday items. That causes the consumer market decrease.
• Real Gross Domestic Products. This market has also been on a decline. When interest rates go up so do prices of products, but the product that are made in your country are going to cost more than products that are shipped to your country. So, consumers have been less inclined to purchase domestic products.
• Industrial Product Index. This market has been on the rise. Since interest rates has been declining consumers have been making purchases. Businesses have been mass ordering to meet their supply and demand.
• 10 – Year Treasury Constant Maturity Rate has been on the rise. So that means that interest rates are low. So, the amount that will be secured by the maturity date will be least amount of money they can accrue.
• U.S./Euro foreign exchange rate has been on the rise. That means that interest rates have been declining. So that means that the U.S. has more money floating around in the economy and has more money to trade with Europe.
• Civilian unemployment rate has been stabilized or came to a standstill. That means that previous interest rate was high and the Fed’s decreased the national interest rate. Since the interest rates have been decreased employers are looking for workers to fill in gap area’s or departments.
• All employees: total nonfarm payroll has been on an increase. That means that interest rates are on the decline. Which means that industrial and brick and mortar establishments are looking to hire more people to meet there demands.
• 4 week moving average of initial claims has decreased. That means that interest rates have increased. When interest rates increase the cost housing will rise also. If you are looking for another place to live currently, chances are rent/ mortgages are going to be high.

The Federal reserve’s primary functions, the effects of their monetary systems, and eight different effects their monetary policy has made on the economy. As you can see the Federal Reserve System is an important part of the U.S. economic system. Without this in place we as citizens would probably be taken advantage of by businesses and banks. They would upcharge consumers every chance they get. When the Fed’s stabilize interest rates it has a major effect on markets, loans, and buying power. It will also dictate how investors maneuver in their power plays, whether it be it stocks, businesses or, real estate.

Reference Page

Madura, J. (2015). Financial Markets and Institutions. (11 ed.). Cengage