The Federal Reserve System is the central banking system of the United States. It was created by the Congress in December 1913 to provide the nation with a safer, flexible, as well as stable monetary and financial system. As such, owing to its mandate, the Federal Reserve System should indeed control the nation’s money supply. In fact, this is a mandate charged to the system through the Federal Open Market Committee (FOMC). In a bid to control the money supply, the committee raises or lowers the federal funds rate to either discourage or encourage borrowing by banks, a concept that controls other aspects of the economy such as inflation. For instance, according to the Monetary Policy Report (2017), the FOMC raised the federal funds rate from ¼ to a range between ½ and ¾ percent to discourage spending due to the expected increase in inflation as well as poor labor market conditions.
The application of the monetary policy by the FOMC above was aimed at expanding the economic activity at a moderate rate as well as strengthen the labor market conditions, which are some of the essentials the reserve system should control. Not only does the system aim at monitoring and controlling the economic activity and principles such as inflation but also employment. While the desired inflation rate is two percent, the desired employment rate is maximum and maintaining these values is what creates economic stability. This is demonstrated further by the money supply measures. With the federal fund rate held at a constant rate of between ½ and ¾, the Money Supply Measures tables indicate a steady increase in the percentage change of money (for example money stock measures from -0.8 to 3.3 to 4.4 in one year) ascertaining the steady growth of the economy. Furthermore, the first table shows an equilibrium between savings and expenditure through the amount of demand deposits as well as savings deposits.
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In essence, the actions of the Federal Reserve System are meant for long-term effects rather than immediate or drastic. To this end, through the monetary policy, the system has control over the economy asserting its influence over inflation, employment, the labor market, and the national income. Subsequently, the reserve system is rightly justified to do so because the manipulation of the money supply has positive effects on the economy such as steady growth as illustrated in the money supply measures thereby resulting in stability. Consequently, an economic boom would lead to inflation and depression or recession such as that of 2008. Resultantly, this would lead to loss of employment and national income, and this is fundamentally why the Federal Reserve System has to maintain stability.
References
Board of Governors of the Federal Reserve System. (2017). Monetary Policy Report. Retrieved from https://www.federalreserve.gov/monetarypolicy/files/20170214_mprfullreport.pdf
Board of Governors of the Federal Reserve System. (2018). Money Stock and Debt Measures - H.6 Release. Retrieved from https://www.federalreserve.gov/releases/h6/current/h6.pdf
