Updated Mar 30, 2022

What are The Federal Reserve System (F.E.D) and its role?

What are Fed and its role?

The Federal Reserve System or FED is the United States of America's central banking system. After a series of financial panics (especially the panic of 1907) led to a need for central control of the monetary system to relieve financial crises, the Federal Reserve Act was passed on December 23, 1913. Events such as the Great Depression in the 1930s and the Great Recession in the 2000s have led to the Federal Reserve System's tasks and responsibilities being expanded throughout time.

There are numerous layers to the Federal Reserve System. The Federal Reserve Board is managed by a board of governors selected by the president (FRB). Privately owned commercial banks are regulated and overseen by twelve regional Federal Reserve Banks situated around the country. Nationally chartered commercial banks are required to own stock in the Federal Reserve Bank of their region and can elect some board members.

Monetary policy is founded by the Federal Open Market Committee (FOMC). It is made up of all seven members of the board of governors as well as the presidents of the twelve regional Federal Reserve Banks, albeit only five of them vote at any given time: the president of the New York Fed and four others who rotate through one-year voting periods. There are several advisory councils as well. It has a structure that is unique among central banks, and it is also unusual in that the currency is printed by the United States Department of the Treasury, which is separate from the central bank.

After dividends on member banks' capital investments are paid and an account surplus is maintained, the federal government determines the salaries of the board's seven governors and receives all of the system's annual revenues. In 2015, the Federal Reserve generated $100.2 billion in net revenue and transferred $97.7 billion to the Treasury; in 2020, earnings are expected to be around $88.6 billion, with $86.9 billion in remittances to the Treasury. 

Role of Federal Reserve System

In reaction to bank failures that resulted in dramatic reductions in credit availability, Congress formed the Federal Reserve Bank, or Fed, in 1913. The Banking Act of 1935 also allowed the Fed to implement policies to stabilize the supply of money and credit during the Great Depression. This work is still ongoing.

The Federal Reserve is now an important part of the American economic structure. Because of its significance, students pursuing an online MBA should be aware of the Federal Reserve's role and how it influences company loans, interest rates, and the economy as a whole.

The Federal Reserve serves as the United States' central bank, with three key responsibilities: managing an efficient and dependable payment system, supervising and regulating bank operations, and formulating monetary policy. 

As per Voice of America, "the most important weapon the Fed has to execute monetary policy is the purchasing and selling of U.S. government assets, which is frequently referred to as open market operations." "A Federal Open Market Committee oversees the open market selling and acquisition of US government assets to impact short-term interest rates and money and credit expansion."

These government assets, which come in the form of notes and bonds, are safe investments that are sold to institutional investors via auctions. The government will repurchase these bonds from the investor when they reach maturity (meaning the note or bond has gathered all of the interest payments it was meant to accumulate).

Investors who sell their notes or bond back to the government can deposit the proceeds into their bank accounts, according to Investopedia.com. As a result, their deposit raises the amount of money their bank may lend and invest in businesses.

The Fed can also have an impact on monetary policy in other ways. It can alter the discount rate — the interest rate it charges financial institutions for short-term borrowing — in addition to selling securities. In other words, when banks borrow from the Federal Reserve's central bank, they get a "discount."

The Federal Reserve also has the power to alter the reserve requirement. Our fractional reserve banking system is built around a bank's reserve requirement, which means that a bank only has to retain a small portion of its clients' deposits on hand. The remaining funds are used to lend to others for home, auto, company, and personal loans. Money is created and used in the economy as a result of this process.

The quantity of money a bank can use is affected by changing this reserve. Banks will either be allowed to lend more money (increasing the amount of money in the economy) or less money (decreasing the amount of money in the economy) if the Fed changes the reserve requirement (reducing liquidity and slowing economic activity).

Because businesses rely on bank loans and investments to get through tough times, expand operations, and market to new demographics, the Federal Reserve's actions have an impact on their monetary decisions. Managers who are familiar with the Federal Reserve's operations can provide useful information and recommendations on their organizations' business decisions. Graduates of an online MBA program can get the requisite knowledge of the Fed's operations to impact their company's financial decisions and operations if they pursue these leadership positions.

What's the Role of the Fed Chair?

Both the Federal Reserve Board and the FOMC take their direction and tone from the Federal Reserve chair. Jerome Powell, a member of the Federal Reserve Board of Governors, is the current chairman. From February 5, 2018, through February 5, 2022, he will serve as chair.

Janet Yellen, who is now the Secretary of the Treasury, was the previous chair. Her stint in office lasted from 2014 until 2018. Unemployment was Yellen's main worry, therefore she was more likely to desire to cut interest rates. She was chair during a time when the economy needs contractionary monetary policy, which was ironic.

From 2006 to 2014, Ben Bernanke was the chairman of the Federal Reserve. He was an expert in the Federal Reserve's role during the Great Depression, which aided him in taking action to avert the financial crisis of 2008. This prevented the economy from collapsing into a depression.

Conclusion

The Fed guarantees that the country's monetary and financial systems are safe, adaptable, and stable. The Fed's key duties include setting national monetary policy, overseeing and regulating banks, ensuring financial stability, and providing banking services.