Federal Reserve System

Federal Reserve System
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INTRODUCTION
The Federal Reserve is the backbone of the American government financial system. It plays a crucial role in controlling and sustaining the government and nation financial system in a stable and good shape i.e stabilize the economic growth of the country. President Woodrow Wilson has introduced the system from about 100 years ago, hence Federal Reserve Act was launched to overcome many issues and obstacles that had occurred in the system (Lowenstein, 2015). It plays important roles to control and main the stability of the economic conditions and mitigate any uncertainty that may occur, this includes sustain market price and increase employment rates, this employed
through a standard monetary policy.
2016 can be a good witness for the GDP nation market growth stability and increased. The stock is performing somewhat, seeing that the nation has faced some uncertainties in the past few months. However, indicators point towards better times, as political heat is slowly subsiding. The bond market has soared in the recent times, following fluctuations in oil prices. Currently, the price of oil has spiked.
Mission
The Fed has provided Funds to alleviate the economic challenges facing the nation. It has enacted programs aimed at supporting the fluidity of institutions and improving market conditions. The impact of this move is that it has stabilized the market, as well as made it possible to employment to resume its rates. It purchases long-term securities, at the expense of short-term government bonds to safeguard the future. Furthermore, being a lender of last resort, it has aided financial institutions against wading off collapses, by making sure that they can withstand economic hardships. Failure of such systems would be especially risky for the American people, as it would cause money-related problems in other sectors of the nation as well.
The primary objective of the Fed should be to moderate inflation deviations from its set goals, such as total employment. It should embark on a balanced approach of promoting its roles in aiding the nation and institutions through tough economic times. In so doing, the citizens will be the sole beneficiary, making life easier for them. Also, troubles such as unemployment will be lessened, as well as the cost of life. It does so to make economic projections, and planning accordingly. Besides the financial aspects of the economy, there are non-monetary issues that influence dynamics in the market as well. Proper considerations of these too should be part of the primary goals.
ANALYSIS - IMPACT
The Federal Reserve has two monetary policy tools it could use to impact the economy. One is open market operations, and the other is altering the discount rate.
Open Market Operations
It is a tool with an impact of the supply of bank reserves.
These transactions consist of Fed purchases and sale of monetary instruments. These tools are mostly tools issued by the country’s Treasury, and federal agencies. Also, national corporations provide part of the securities for these transactions to occur. The good thing about open market operations is the ease with which they inject money into the country’s economy (Mayes & Toporowski, 2007). It is almost immediate, making them a suitable tool for monetary policy. More so, they are unlimited; hence could be carried out on a daily basis to adjust the economy in minor calibrations. They work in place of interest changes in these fine calibrations.
The downside with these operations is that the money market has to be developed. Otherwise, the Fed will be unable to exert total control of bank reserves. In this case, the government securities that were already sold become ineffective. Also, an increase in currency requirements may cause a note to be withdrawn. As a result, reserves in banks may not increase, creating unfavorable loan
conditions.
Open market operations contribute to improvements in the GDP, by increasing the money supply and use in the market. Also, it cements growth of the GDP through long-term interests of federal reserves. The change in the money supply influences the interest rate as well. OMO lead to lower interest and discount rates. These alterations in the rates make it easier for borrowing to occur, which in turn increase spending. Consequently, prices in the bond and stock markets rise.
Discount Rate
The discount rate entails the charges the Fed asks as a commission for short-term loans.
The money is lent to depository institutions such as banks. Money borrowed from the Federal Reserve is mostly meant to fix minor shortcomings (Burgess & Jenkins, 2010). They are useful in that; they trigger changes in the market by influencing the monetary policy. They impact decisions by market players; hence critical in communicating actions aimed at achieving the desired outcomes. Discount rates, though not immediate, affect the economy in the long run. Thus, they are useful in making changes aimed at improving the future.
Nonetheless, they have their shortcomings as well. Since borrowing from the Fed is discouraged, they are rarely useful. They are unreliable in that, they are not constant, hence not suitable for decision-making. Also, high discount rates indicate a restrictive policy, which may inhibit user action such as spending. A number of interests charged on borrowed money, in turn, influences other activities such as consumption and business spending. The downside to this is, if the impact is negative, it spreads throughout the
economy.
While financing goes higher, spending increases as well. There is more money in the market, and therefore stocks and bonds prices spike. Also, exchange rates go up too. The opposite happens when discount rates are lowered.
Regulatory Climate
Apart from the federal reserve, the government influences the market as well, placing restrictions on the market. The move is aimed at safeguarding the consumers from exploitation by businesses. Government oversight ensures that the market is at all times healthy, to avoid unfair gains or losses, or activities that may destabilize the economy. The regulatory climate by the government has no fixed effect. It almost works all the time, regardless of who gets hurt. The government’s concern is the bigger picture. The upside of this is, the market is always in a state of balance.
RECOMMENDATION
I feel that the market and the economy is at its optimum, save for a few hiccups. The measures in place are working as they should; hence no need for changes. Besides, the Federal Reserve oversees activities in the national market, making sure there exists an even platform for business and consumers alike. Besides, government regulation aids in the maintenance of a stable market and an open economy as well. The situation should be left as it is, owing to its intricacy. Changes in any aspect of the economy are bound to influence other sectors, however dismally. Hence, any suggestions should account for all elements, which is a very complicated process.
Bibliography
Burgess, D. F., Jenkins, G. P., (2010). Discount rates for the evaluation of public-private partnerships. Kingston, Ont: John Deutsch Institute for the Study of Economic Policy, Queen's University.
Lowenstein, R. (2015). America's bank: The epic struggle to create the Federal Reserve.
Mayes, D. & Toporowski, J. (2007). Open market operations and financial markets. London: Routledge.