The Federal Reserve System are also recognized as the Federal Reserve serves as the central banking system in the US. The Federal Reserve Act of 1913 led to the creation of the Federal Reserve following numerous financial panics and the crucial need for control of the monetary system. On this note, it has various duties that could affect the financial status of the country. However, its important mandate is to ensure that there are high employment levels, advocate for sustainable growth, stabilize the interest rates particularly on the long-term and guarantee the stability of prices that will help keep the purchasing power of the dollar at a high.
The Federal Reserve achieves this standard through serving as a bank for other financial institutions. It also acts as a bank for the US Treasury by handling all revenue earned through taxes and ensures the government makes all necessary outgoing payments. The Fed also issues the government with coin and paper currency by distributing it to the financial institutions. It also plays the role of supervisor and regulator for all banks including those that are members along with its international activities, the foreign banks, and their activities in the US. This responsibility ensures that the facilities act to the best interest of the public while helping create federal laws. Its primary duty is to devise and implement the monetary policy. It is this function that affects open-market operations, setting the reserve requirements and the discount rate.
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The discount rate is an action undertaken by the Federal Reserve under the monetary policy where they set interest rates on the loans offered to other commercial banks and other financial depository institutions. This action by the Fed helps minimize problems associated with liquidity and reserve requirements. On this note, the discount rate helps control of money supply into the financial markets ensuring the stability of the same. Through the discount rate, the institution can monitor the inflation with is set at a target of 2.0% and pursues the highest employment by ensuring unemployment is between 4.7% and 5.8% (Derby, 2017). By making restricting borrowing of banks and its significant consumers the Federal Reserve raises interest rates making credit too expensive. Many of the institutions will refrain from borrowing money from the reserve and consequently reduce the amount offered to its customers. This action helps in reducing inflation.
In the last three years, the Federal Reserve has taken action in allowing credit for its member banks and the other depository institutions. This work is evident where the organization has steadily reduced the interest rates for funds offered by the commercial banks. In 2013, the Federal funding rate was at 4.0% for all its members. This action resulted in significant growth of the gross domestic product surpassing the target of 2.0% as the country achieved between 2.3 and 2.5 percent (The Fed, 2016). The restricted supply of money in that year ensured that the country would benefit from the economic growth realized. However, it was evident that the unemployment rate was quite high as it achieved 5.2-6.0 percent (The Fed, 2016). This encounter resulted in a large number of unemployed persons reducing the revenue earned by the government. The years to follow, the Federal Reserve significantly reduced the funding rate to its member banks.
It is important to note that when the organization perceives that there is no risk of possible inflation interest rates are dropped in the Federal funding. As a result, the increased supply of money into the financial markets enable the business to increase their capital that is reinvested for further growth and development. The subsequent result of this occurrence is increased job opportunities as the majority of the large corporations are expanding immensely as will other smaller businesses. The rate of unemployment significantly drops a measure that the country has experienced in the previous three years. The Federal funding has declined for the year 2014 through to the year 2016 from 3.75% to 3.0% (The Fed, 2016). During this period the unemployment rate has also reduced from 5.2-5.5 to 4.7-5.0 (The Fed, 2016). In this regard, the actions of the Federal Reserve have provided positive results to the citizens by increasing their purchasing power through high levels of employment.
Previous Unemployment Rates
Nevertheless, the main problem that the institution experienced is a significant drop in the GDP growth and significant increases in its portfolio (Derby, 2017). The recent December Jobs report showed the 75th straight month of employment growth experienced during the Obama administration. The month of December marked an increase of 156,000 jobs in the US market. This occurrence resulted in reduced unemployment and a total annual tally of below 2.2 million jobs (Vigna, 2017). According to the report, this job adjustment among US employers was lower than the expected total of 170,000 and far less than that of o 204,000 experienced in November. The wages had however realized a momentous increase of 2.9% compared to the previous year (Vigna, 2017). This activity shows that the members of the public are benefiting from the practices of the Federal Reserve. Higher pay means greater liquidity in the financial market.
Despite a drop in the economic growth rate, the December jobs report show that there is no cause for panic and that the economy is stabilizing. On this note, the lower increase in job rates may point out that the labor market is nearing full employment where all citizens within employable age have a source of income. This practice will mean that the government along with other employers will increase productivity and ensure a stable economy in the future. The workers in the private sector are noted to earn an average of $26 an hour which is nearly double the minimum wage requirement in the country. As a result, the high income is the strongest since 2009 (Vigna, 2017). As the labor market continues to tighten the economy of country performs better off than its previous occasions. Since the recession of 2008, the Federal Reserve has taken great caution to curb inflation and reduce unemployment in the country. The reports of the current labor market are a clear indicator of positive developments.
The Federal Reserve had earlier showed that it would raise the interest rates at a faster rate in the year 2017 but may not resort to such actions following the continued improvement of the employment. Though in the month of December unemployment rate increased by one-tenth of a percentage compared to November to 4.7%, this continues to be lower than the experiences of the Recession period where in January 2009 it was noted at 7.8% (Ferreira, n.d.). The figure demonstrates an immense effort by the Obama administration to ensure that the positive gains of the economy through Gross Domestic Product are translated into increased job opportunities. The above are positive results despite the occurrence of high underemployment and low participation of 9.2% and 62.7% respectively (The Fed, 2016). In the three years before the recession underemployment was set at an average of 8.5% while participation is recognized as nearing a four-decade low.
Through the above discussion, it is evident that the Federal Reserve has undertaken significant action to ensure reduced unemployment and minimize effects of inflation. In this case, the organization has recognized a state of no risk of inflation in past three years and consequently provided a discount rate of the long-term credit for their member commercial banks. Through this action, corporations have been able to expand their businesses offering a higher rate of employment nearing full employment of the labor market. The Federal Reserve has also taken drastic measures of monitoring the available commercial banks in their local and international activities to ensure appropriate valuing to reduce portfolio of mortgage and Treasury securities. This action would curb the effects of inflation.
The Fed is rethinking one thing too many . (2016, August 09). The Economist, Retrieved from http://www.economist.com/blogs/freeexchange/2016/08/absence-evidence?zid=295&ah=0bca374e65f2354d553956ea65f756e0
Derby, M. S. (2017, Jan 29) Fed Grapples with Massive Portfolio. The Wall Street Journal, Retrieved from https://www.wsj.com/articles/fed-grapples-with-massive-portfolio-1485717712
Ferreira, J. (n.d.). United States Unemployment Rate | 1948-2017 | Data | Chart | Calendar . Trading Economics, Retrieved from http://www.tradingeconomics.com/united-states/unemployment-rate
Vigna, P. (2011, Jan 9) December Jobs Report ‘Softer’ Than It First Looked, Gluskin Sheff’s Rosenberg Says . The Wall Street Journal, Retrieved from http://blogs.wsj.com/moneybeat/2017/01/09/december-jobs-report-softer-than-it-first-looked/