Federal Reserve System Research Paper

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Federal Reserve, Banking and Inflation William Ward Axia College of University of Phoenix ECO 205 Lydia Portee July 27, 2008

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Introduction The Federal Reserve Board of Governors Federal Reserve Functions The Money Supply Inflation Cause Effect Controlling Conclusion

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The Federal Reserve History Mission Ownership Funding Accountability

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Structure Appointments Representation Contacts within Government

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Board of Governors Ben Bernanke - Chairman Donald Kohn - Vice Chairman Kevin Warsh Randall Kroszner Frederic Mishkin

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Federal Reserve Functions Monetary Policy Maintaining financial system Providing financial services
Created in 1913 by the Federal Reserve Act, it is a federal banking system composed of a presidential appointed Board of Governors. It includes 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors. There are also numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks. The intent of Congress in shaping the Federal Reserve Act was to keep politics out of monetary policy. The System is independent of other branches and agencies of government. It is self-financed and therefore is not subject to the congressional budgetary process (Federalreserve.gov, 2007). Mission Today, the Federal Reserve 's responsibilities fall into four general areas: conducting the nation 's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices supervising and regulating banking institutions to ensure the safety and soundness of the nation 's banking and financial system and to protect the credit rights of consumers maintaining the stability of the financial system and containing systemic risk that may arise in financial markets providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign
Most investors aim to increase their long-term purchasing power. Inflation puts this goal at risk because investment returns must first keep up with the rate of inflation in order to increase real purchasing power. For example, an investment that returns 2% before inflation in an environment of 3% inflation will actually produce a negative return (-1%) when adjusted for inflation. Another example would be a five-year bond with a principal value of $100. If the rate of inflation is 3% annually, the value of the principal adjusted for inflation will sink to about $84 over the five-year term of the bond. Inflation can be harmful to fixed-income returns in particular. Many investors buy fixed-income securities because they want a stable income stream, which comes in the form of interest, or coupon, payments. However, because the rate of interest, or coupon, on most fixed-income securities remains the same until maturity, the purchasing power of the interest payments declines as inflation rises. Inflation can adversely affect fixed-income investments in another way. When inflation rises, interest rates also tend to rise either due to market expectations of higher inflation or because the Federal Reserve has raised interest rates in an attempt to fight inflation. When interest rates rise, bond prices fall. Thus, inflation may lead to a fall in bond prices, potentially reducing