There is a need for any country to have its central Bank. Unlike most countries, which use the central Bank system, the U.S has a federal Banking system which is also known as the fed. The headquarters of the federal Bank is in the capital Washington D.C and also has other twelve district banks in different locations. Federal Reserve Act established the fed in 1913 and was formed to solve problems of money in the country (Gali, 2009). The decisions made by the federal Bank directly affect the safety and soundness of the country’s financial system.
The federal Bank acts as a fiscal and monetary policy agent of the Bank. The Federal Reserve System was established with 12 regional Banks to meet the needs of the country’s complex and large economy by decentralizing its functions to the regions. The 12 branches which are set up all over the country facilitate the supervision of commercial Banks in that particular region and also serve as the Banks agent when implementing monetary policy (Walsh, 2010). Locations of these branches were selected on the basis of convenience to serve the region and also other political reasons. The Fed was made quasi-independent from the federal government for it to carry out its functions objectively without interferences from the government.
The main functions of the fed are to create a sound financial system for the country and protect its citizens from inflationary pressures. The monetary and fiscal policies formulated by the Federal Reserve Bank enables the economy to run smoothly. The Federal Reserve BANK has six functions; control of the money supply is the objective of any central Bank. Supply of money is one of the causes of inflation; hence the Fed is mandated to prevent the occurrence of inflation which has a negative effect on the economy. The second function is supplying the economy with paper money. The Federal Reserve notes are printed in Washington D.C and the issued to the 12 Federal Reserve district Banks which keep money in hand to meet demands of the public (Gali, 2009).
Holding Bank reserves is another function of the Federal Reserve Bank. Each commercial Bank is required to keep a reserve account in one of the 12 district federal Bank. An account with the federal Bank ensures that there is optimum supply of money in the economy. It also provides check clearing services, when a person in a different state writes a check to a person in another state; the Fed facilitates the entire process. Another role of the fed is to supervise commercial Banks. Without seeking any permission, the fed can check books of a Bank to determine how accurate they are and whether they follow Banks regulations. Lastly the Bank serves as a lender of last resort to commercial Banks. When a commercial Bank has no other option on whom to borrow when it has a shortage of funds it turns to the Fed.
The Federal Reserve Bank receives its resources from the interest on securities that the government has acquired through open market operations, investment in foreign currency and charges on services provided to commercial Banks and other depository institutions (Labonte & Makinen, 2006). It does get its funding through congressional budgetary process. This makes it possible for the Fed to be act independently from the influence of the federal government. The Fed is moving towards a more expansionary monetary policy because it uses it as a tool to spur economic growth. By reducing the discount rate, the fed encourages more lending for private investment. However, economists should know when to reduce the discount rate so that it does not cause inflationary effects.
Gali, J. (2009). Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework. Barcelona: Princeton University Press.
Labonte, M., & Makinen, G. E. (2006). Monetary Policy and Price Stability. London: Nova.
Walsh, C. E. (2010). Monetary Theory and Policy. San Francisco: MIT Press.