It is necessary to note that the Federal Reserve System has a crucial mission of the nation’s economy sustainability protection. The Fed was created by the U.S. Congress in 1913 to ensure the improvement of the financial and monetary system’s performance. The Federal Reserve Act was signed by the U.S. President Woodrow Wilson. It is essential to mention that the Fed is an independent structure. The government has no impact on the activities of the Federal Reserve in order to avoid the political bias. The Federal Reserve Act reveals the basic principles of the Fed’s functioning. According to the act, there are several fundamental aims of the Fed.
First, the Federal Reserve has a direct impact on the lending rates for organizations and individuals. Thus, the Fed raises or lowers interest rate, which leads to the structural change of the banking sphere. The Fed has an opportunity to regulate the demand for credits, which is crucial for the development of the economy in the modern liberal society. At the same time, the use of the credit policies makes it possible for the Fed to control prices and even employment.
Second, the Fed is responsible for the regulation and supervision of the U.S. banks. The observation of the performance of different financial institutions protects the American citizens from potential financial frauds. Furthermore, the Fed guarantees that the national banking system works in accordance with the U.S. economic strategy (Bernanke 2015). Needless to say, that the power to influence the decisions of various banks is very important for the Fed’s efficiency.
Finally, the Federal Reserve has to analyze the global financial trends and regulate the national economy in accordance with these evolutionary changes. Obviously, there are many risks, which regularly occur on the transnational markets (Bernanke 2015). For example, the global financial crisis could undermine the functioning of the U.S. economy. Consequently, the Fed needs to be ready to take action in case of any urgency.
It is important to highlight that there exists a difference between the economic stability and the financial stability parts of the Fed’s mission. It is rational to state that the economic stability is mostly the secondary aspect of the Fed’s mission. The Federal Reserve has an impact on the unemployment rate and consumer spending with the help of the monetary mechanisms.
Evidently, the basic Fed’s decision is related to the change of the interest rate, which leads to the changes in the financial system: “conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy” (Federalreserve.gov 2017). In such case, the economic outcomes are inevitably connected with the state of the financial sector.
As it has already been mentioned, the Federal Reserve constantly monitors the national financial system and adjusts the situation by raising or lowing the interest rate. This solution has a domino effect on the several aspects of the behavior of organizations and individuals. The higher interest rates make it more complicated for the people to take credits. Consequently, the growth of economy decreases. At the same time, the consumer spending becomes lower due to the absence of free resources. The decision to slow down the growth of economy could be used by the Fed to prevent inflation and potential financial bubbles. The lower interest rates stimulate the development of the markets because it becomes easier for the companies to take credits. Accordingly, the number of the home sales, the business profits, and the indices of consumer spending become higher.
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Bernanke, Ben. (2015). The Federal Reserve and the Financial Crisis. Princeton University Press. 144.
Federalreserve.gov. (2017). What is the Purpose of the Federal Reserve System? Federalreserve.gov. Retrieved Mary 4, 2017 from https://www.federalreserve.gov/faqs/about_12594.htm