Analysis of Federal Reserve

Federal Reserve
Luke SkyScrapper
Finance 366
January 30, 2012
Joseph Vader

Federal Reserve
Federal reserve is the backbone of the US economy. The Federal Reserve serves as our country nation’s bank. The fed functions are to regulate our major financial institutions and control the flow of money in our country.
The Federal Reserve System was created by the Congress because of the Federal Reserve Act in 1913 to fix some flaws of the national banking systems that become clearly visible during the 1907 financial crisis. The goals for the Federal Reserve System to establish:
1. Monetary authority that will expand and contract the nation’s money supply according to the needs of the nation.
2. Furnish additional funds to banks in times of financial crisis.
3. Effective payment system for clearing and collecting checks at face value throughout the country.
4. Strong bank supervision to prevent or reduce the risk bank failures (Kidwell, Blackwell, & Whidbee, p. 62, 2008).
One of the functions of the Federal Reserve has executive and regulatory authority over financial institutions and activities. The fed works with other federal and state organizations to make sure the safety of financial institutions, stability in the financial markets, and a fair treatment of citizens in their financial transactions. As bank supervisor, the Federal Reserve set up standards designed to assure that banking organizations function in safe and sound manner and in accordance with applicable law. These standards may take the form of regulations, policy guidelines, rules, or supervisory interpretations and may be set up under specific arrangements of a law or under more accustomed legal authority ("The Federal Reserve System Purpose And Functions", 2011).
The Federal Reserve overlook thousands of bank holding companies, hundreds of state bank members of the Federal Reserve Banking System, and any foreign banks operating in the US. The Federal Reserve Banking System is organization of 12 Federal Reserve banks that both overlook as banks for all the commercial banks in their region. The Federal Reserve power to oversees banks has been greatly enhanced with the Dodd-Frank Wall Street Reform Act. If any of the bank that overlook by the fed becomes too big to fail, it can be turn over to Federal Reserve supervision, which can then increase its reserve requirement enough to protect against any loses (Amadeo, 2012).
Another function of the Federal Reserve is to set monetary policy. The reason that the fed set the monetary policy is to promote the objectives of maximum employment, steady prices, and moderate long-term interest. When the prices is steady and believed will remain so, the prices of goods, services, materials, and labor are undistorted by inflation and serve as pleasant signals and guides to the adequate allocation of resources and in such way to higher standards of living. The monetary policy affects the economy through raising or lowering the interest rates is to influence individuals and firms demand for goods and services ("The Federal Reserve System Purpose And Functions", 2011).
The Federal Reserve controls the inflation in our current economy by managing credit, the largest component of the money supply. The Federal Reserve restricts credit by raising the interest rates and making the credit more expensive. This cut the money supply, which controls the inflation. Steady inflation today is like cancer that destroys the growth of economy. If there is no risk of inflation, the Federal Reserve makes credit more affordable by lowering the interest rates. This strategy will trigger the business growth, and ultimately reduces unemployment. The Federal Reserve supervises the inflation through the core inflation rate, as measured by the Consumer Price Index (Amadeo, 2012).
The Federal Reserve worked hand to hand with the Treasury Department to prevent global financial downfall and to prevent any further damage to our economy from the financial collapse during the financial crisis of 2008. Both of the government agencies created many tools, including the Term Auction Facility, the Money Market Investor Lending Facility, and Quantitative Easing. The Federal Reserve purpose and functions would directly affects our financial life. The situation in stock markets, mutual funds, bond prices and loan rates are depends on the actions taken by the Federal Reserve.  
Reference
Amadeo, K. (2012). The Federal Reserve System and Its Function. Retrieved from http://useconomy.about.com/od/governmentagencies/p/fed.htm
Kidwell, D.S., Blackwell, D.W., & Whidbee, D.A. (2008). Financial Institutions, Markets, And Money (10th ed.). Retrieved from The University Of Phoenix eBook Collection.
The Federal Reserve System Purpose and Functions. (2011). Retrieved from http://www.federalreserve.gov/pf/pf.htm