Federal Reserve System Case Study

Congress created the Federal Reserve System, which is the central bank, on December 23rd, 1913; it revolves around 12 Reserve Banks and 7 Board of Governors. The 12 banks the Fed is separated into are not equally divided—they are based on the importance of their financial activities. The role of the Fed in the U.S. economy revolves around monetary policy by purchasing and selling government securities, increasing or decreasing the required reserve ratio, and using the discount rate. It also focuses on the safety and security of the banking system and following regulations. These conditions adhere to the dual mandate of the Fed—maintaining a low rate of inflation and low unemployment. Therefore, looking at the Board of Governors, the Regional
and it contains 7 members. Unlike the Regional Reserve Banks, this board has a chairman instead of a president. Thus, the 7 members are appointed by the president of the U.S. and approved by the Senate. An interesting factor that takes place is that the president selects the chairperson and then the elect can stay in that position for 14 years. While this may be the case, it is renewed every 4 years—once the fourth quarter hits, the person has 2 years left. Regardless, the chairman has to be approved by the president each term. Therefore, the importance of the Board of Governors is that they control two monetary tools—the required reserve ratio, and the discount rate. A required reserve ratio is the amount of money a bank has to keep as cash from depositors. This tool is important because if the reserve ratio is low, banks are able to use that money and invest it; such an action would create more money in the economy due to profit. On the other hand, if the reserve ratio is high, more cash is sitting in the bank—resulting in money that cannot be invested. Therefore, a high reserve ratio is detrimental because of the lack of circulation and profit happening in the economy. However, when the Federal Reserve lends to other banks, it is called the discount rate; this is the rate of interest banks must pay the Federal Reserve Banks. If the rate is low, banks will borrow more and lending will increase. If the rate
Likewise, the Federal Reserve System has their goals made for them by congress—allowing them to attain these goals through their own actions. A major role played here is that the FRS has to give over a hundred million dollars to the treasury department every year. Despite this, each Reserve Bank has a president and works on clearing checks and making rules and regulations for the member banks in their districts. Allowing everything to be controlled and