The Federal Reserve System Home The Federal Reserve System Why was the United States one of the last major industrialized nations to form a Central Bank? Most states were left to govern their own monitory policies. With the diminishing value of the Continental after the Revolutionary war, the United States became skeptical of the use of unbacked currencies. It is after numerous setbacks and financial panics, especially in 1907 that led to the establishment of the Federal Reserve System. If Reserve Requirements at the USA’s Federal Reserve Bank were eliminated in the near future what effects would this have on the size of Money Market Mutual Funds? The Reserve Requirement sets the balance that the Fed requires a depository institution to hold in the Federal Reserve Banks that various depository institutions trade in the federal funds. If they are eliminated in the near future, the size of Money Market Mutual Funds will be uncontrollable. If large funds are withdrawn, they may be depleted and viceversa. Why the Federal Reserve Bank System was set up with Twelve Regional Banks rather than have only one? The Federal Reserve Bank System was set up across regional banks to spread it so as to prevent power from being concentrated in one location or by a single interest group. This was especially due to the longstanding tradition of distrust involved with centralized power. The Federal Reserve System resembles the U.S. constitution in that it was designed with many checks and balances. Explain and discuss this statement in detail. The Federal Reserve’s structure is designed so as to incorporate a strong system that would ensure checks and balances. The fact that it has been decentralized and has a wide range of participants eliminates any chance of a single entity gaining too much control of it. Moreover, each of the System’s tools is under the authority of different groups in the system. The board of governors, its chairman, the boards of directors for the individual Reserve Banks, and the open market operations has different roles and are controlled by different groups. The overall structure of the Federal Reserve as well as, the above checks and balances ensure that its decisions represent the broad interest of the United States. In what ways can the Twelve Regional Federal Reserve Banks influence the conduct of Monetary Policy? The Federal Reserve Banks administer discount lending at each bank. They also have five of the twelve votes on the Federal Open Market Committee that makes decisions regarding Open Market Operations, which is the Federal Reserve System’s main policy tool. Which entities in the Federal Reserve System control the following? a) Discount Rate? The boards of directors for the individual Reserve Banks b) Reserve Requirements? The Board of Governors c) Open Market Operations? The Federal Open Market Committee Explain why you think the 14 year Non-renewable terms for governors effectively insulate the Board of Governors from political pressure? The terms they are given are staggered so that one term expires after every two years. in order to limit the president’s control over the System or other political pressures, the governors serve one nonrenewable 14-year term, each governor’s term expires every other January. The governors are also required to come from different districts. Compare the structure and independence of the Federal Reserve System and the European System of Central Banks. They are fairly similar in organization. While the Fed has twelve regional banks and the Board of Governors, the ECB has an executive board and national central banks. However, there are some structural differences; for example, the budgets for regional banks in the Fed system are established by the Board of Governors, while in Europe, the national central banks finance the Executive Board. The national central banks in the ECB together have a majority in the Governing Council, but the majority voting in the FOMC is to the Board of Governors. Furthermore, the ECB does not fully supervise or regulate financial institution when compared to the Fed. Moreover, the Fed System has more goal independence while the ECB has more political independence. The ECB ensures that there is price stability, while the Fed is free to ensure low unemployment and low inflation as well. The Federal Reserve Bank is the most independent of all U.S. government agencies. What is the primary difference between it and other U.S. government agencies that explains the Federal Reserve Bank’s greater independence? The Federal Reserve System is considered to be very much independent due to the fact that its decisions so not have to be ratified by the President of the United States or anyone else in the executive branch of the government. It is only the Congress who oversee the entire system. Furthermore, the System does not in any way require public funding; it derives its purpose and authority from the Federal Reserve Act that was passed by the Congress. What is the primary tool that U.S. Congress utilizes to exercise control over the Federal Reserve Bank System? The Federal Reserve Act is the Act of Congress that grants the Congress the legal authority to exercise control over the Feral Reserve Bank System, which is to issue legal tender. The system is subject to the oversight of the Congress, since the U.S. constitution gives the Congress the power to coin money as well as set its value. Despite the fact that those powers were delegated to the Fed, the Congress could reclaim it. The system has to act within the framework of the overall objectives of financial and economic objectives as established by the Congress.
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