Introduction
The Federal Reserve System (The Fed), also central bank, is the most influential single actor in the economy of America and the world. The primary duty of The Fed is controlling the money supply around the world. The Federal Reserve System operates using three of its component. The Board of Governors directs the monetary policies around the world. The board is made up of seven members, with the duty of establishing the discount rates as well as reserve requirements for the reserve banks. There are staff members who are economists, in charge of conducting economic analyses which is essential due to monetary reporting. The Federal Open Market Committee (FOMC) is in charge of opening the market operations, such as the fed fund rates which guides how the interest rates will be established.
Federal Reserve Bank involvement extends to the Fractional Reserve System. Since Fractional Reserve System is involved in money, creation, the Fed is involved in regulating the rates to avoid causing inflation in the globe. Therefore, The Fed supervises the operations of the Fractional Reserve System. The following work will describe how Federal Reserve System is involved in the Fractional Reserve operations and banking operations in America and the globe.
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Federal Reserve Bank Duties in the Banking System of America
Managing inflation
The Fed has an essential role in the banking system of America and globally. The first duty of the Federal Reserve Bank is controlling inflation through credit management, which is the most significant component of the money supply. The Federal Reserve Bank is in charge of printing money, therefore making sure that excess cash is not released in the economy which results in inflation. It makes sure that the long-term interest rates function through the open markets and the fund rates established by the bank (Wang, Whited, Wu, & Xiao, 2018). When the risk of inflation does not exist the interest rates are lowed to make the credit cheaper. It results in increased liquidity, and that supports the growth of a business, and it reduces the levels of unemployment in the states. There is a core inflation rate that is used in monitoring inflation, and it is measured using the Personal Consumption Expenditures Price Index. The index removes some products such as the price of gas and volatile food from the regular inflation rate since the costs of such products increase in summer and reduce in winter. Such changes ate too fast for the Federal Reserve Bank to manage.
The expansionary monetary policy is used in lowering the interest rate, and the result is a quick growth in the economy which in turn creates job opportunities. When the growth of the economy is too much, inflation is triggered, and the contractionary monetary policies are used to increase the interest rates. When the interest rate is high, borrowing becomes expensive. The more the loan costs in a nation, the businesses are unable to raise their prices and the Federal Reserve Banks ensures that the United States does not get to that point. The Federal Reserve ensures that reserve requirements of the banks, where the banks are expected to have 10 % cash at hand of their deposits on every night. If the cash at hand is not achieved at the end of the day, the bank is expected to borrow from other institutions (Hetzel & Richardson, 2018). The payment is made with an interest rate determined by the fed fund rates which requires the banking operations to be continuously supervised.
Banking System Supervision
The Federal Reserve is in charge of about 5000 companies in charge of banks, international banks operating in America and 850 states which are bank members. The Banking System is made up of twelve Federal Reserve banks responsible for supervising and serving as banks for the commercial banks in their areas. These twelve banks are responsible for serving the Treasury in America which is done by making sure that the payments are made, selling securities belonging to the government and helping with the management of cash and investment operations (Dula & Chuen, 2018). The reserve banks are also involved in researching economic issues to inform the central banks before making financial decisions such as investments. The powers of the Fed over the banks were strengthened by the Dodd-Frank Wall Street Reform Act. The Fed can turn a bank that is becoming too big to the Federal Reserve supervision so that it can gain better protection against losses. The Act also made it possible for the Fed supervises institutions which are considered systematically important. The Large Institution Supervision Coordinating Committee created in 2015 is in charge of regulating the sixteen largest banks and stress testing thirty-one banks (Eichengreen, 2018). The tests are meant to establish if the banks have enough capital for operations such as making loans in case of system failure.
Maintaining the Stability of the Financial System
The Federal Reserve operates with other related departments in preventing the financial globe in the world, for instance, the partnership in 2008 financial crisis, with the Treasury Department. To create stability, various tools were used such as the Quantitative Easing, Money Market Investor Funding Facility, and Term Auction Facility (Monnet, 2018). Some of the operations, however, if not monitored closely, it can result in some measures which can worsen the financial situation. In 1929, for example, the operations of tightening the money supply worsened the Great Depression.
Provision of Banking Services
The Fed is in charge of purchasing the Treasury’s from the federal government in America, a process known as monetizing the debt. The money for purchasing the Treasury has to be created, which is added to the money supply. All the Reserve banks can process their checks, borrow loans for their members and store currency with the Fed and it helps in meeting the reserve needs (Rockoff, 2018). The loans given to the Reserve banks are done so at a certain discount known as a discount window. However, there is a stigma associated with these loans as it is assumed that the bank is unable to secure loans from other banks.
Fractional Reserve System and the Federal Reserve Bank’s Involvement in it
Fractional Reserve System is responsible for making loan investments, accepting bank deposits and ensuring that the reserves of a bank are equal to the deposit liabilities. The reserves are usually held in currency form. The operations of Fractional Reserve System brings in the involvement of the Federal Reserve System in various ways such as regulating how the commercial banks operate in activities such as making the interest rates for the borrowed loans (Bullard, 2018). The Federal Reserve Bank is also involved in the money making the process by the Fractional Reserve System. Despite the borrowing made, the banks are expected to have 10 % cash at hand at the end of each day operations. Since Fractional Reserve Bank accepts promissory notes, The Fed follows the process to make sure that payments have been made. Some of the regulations made by the Fractional System have to be approved by the Fed, for instance, on how a financial crisis should be handled, lending and liquating money (Anderson, Calomiris, Jaremski, & Richardson, 2018). The involvement of the Fed is mainly to ensure that a financial crisis is avoided by conducting wrong banking operations.
The Federal Reserve System is involved in the fractional-reserve operations of regulations. The creation of the central banks and the bank runs are meant to address the problems related to financing around the world. Through the central banks, the fractional-reserve is used in imposing restrictive needs in offering protection to the creditors who have government funds and relieving a bank or an individual from bankruptcy. The central banks offer support to the distressed banks through offering loans. That is where The Fed steps in by setting the interest rates that should be used and also offering loans at Fed Fund rates depending on the money requirements of the bank.
The Fed is also involved in liquidity and managing capital for a bank. There is a minimum reserve ratio that has been set-up which the bank should achieve and if the ratio falls, a response is provided by the fractional reserve. The responses range from reducing the dividends, increasing the capital instruments, restricting investments such as in new loans, using loans which have to be repayable within a specified period and redeeming or selling the available assets which help to liquidity the available cash (Wang, Whited, Wu, & Xiao, 2018). The funding options usually differ in cost and reliability, requiring banks to maintain a low-cost stock and ensure that the sources of liquidity are reliable. Such include increasing deposits with other banks and ensuring that the lines of credit are committed.
Conclusion
Monetary regulation is an essential operation around the world. The Federal Reserve Bank is responsible for such services, and they are meant to ensure that another depression will not be experienced. The Fed is in charge of analyzing the economy which guides in operations that need to be implemented to avoid a financial crisis, inflation or economic downfall.
References
Anderson, H., Calomiris, C. W., Jaremski, M., & Richardson, G. (2018). Liquidity risk, bank networks, and the value of joining the Federal Reserve System. Journal of Money, Credit and Banking , 50 (1), 173-201.
Bullard, J. B. (2018). Welcoming Remarks: at the Sixth Annual Community Banking in the 21st Century Research and Policy Conference, Federal Reserve System, Conference of State Bank Supervisors (CSBS) and Federal Deposit Insurance Corp.(FDIC), St. Louis, Mo (No. 322).
Dula, C., & Chuen, D. L. K. (2018). Reshaping the Financial Order. In Handbook of Blockchain, Digital Finance, and Inclusion, Volume 1 (pp. 1-18). Academic Press.
Eichengreen, B. (2018). The Two Eras of Central Banking in the United States. Sveriges Riksbank and the History of Central Banking , 361.
Hetzel, R. L., & Richardson, G. (2018). Banking and Monetary Policy in American Economic History from the Formation of the Federal Reserve. The Oxford Handbook of American Economic History , 2 , 277.
Monnet, C. (2018). The Future of Fractional-Reserve Banking. Monetary Economic Issues Today: Festschrift/Mélanges/Festschrift zu Ehren von/en l'honneur de/in honour of Ernst Baltensperger , 161.
Rockoff, H. (2018). Milton Friedman and Anna J. Schwartz on the Inherent Instability of Fractional Reserve Banking. In Coping with Financial Crises (pp. 107-129). Springer, Singapore.
Wang, Y., Whited, T. M., Wu, Y., & Xiao, K. (2018). Bank market power and monetary policy transmission: Evidence from a structural estimation. Available at SSRN 3049665 .
