Research Paper Draft

           There is probably no other group in the United States that affects monetary policy more than the Federal Reserve System. The Fed is an independent entity within the government that seeks to regulate the monetary policy of the U.S. and acts as the country’s central bank. It was created in 1913 by an act of Congress, the Federal Reserve Act, and signed by President Woodrow Wilson. Today, the Fed’s power has grown substantially and it has an even greater influence on the economy than originally intended. As the Federal Reserve gains influence, Americans are beginning to pay more attention to what the Fed does, especially under the two most recent Chairmen of the Fed, Alan Greenspan and Ben Bernanke. Therefore, it is important to understand what exactly the Federal Reserve does and how its impact on the monetary policy in recent years has shaped the U.S. economy.

            The structure of the Federal Reserve is much different from other governmental organizations with similar political clout. The Federal Reserve System is made up of a central bank in Washington D.C. and 12 regional banks throughout the country. These banks “share responsibility for supervising and regulating certain financial institutions and activities; for providing banking services to depository institutions and to the federal government; and for ensuring that consumers receive adequate information and fair treatment in their business with the banking system” (FRQ: System). Although the Federal Reserve is an independent agency, it receives its authorization from Congress. It must report to the Speaker of the House of Representatives once and year and testify before the Congressional banking committees twice a year. Members of Congress may also request that a member of the Fed testify before Congress. However, Congress does not have complete authority over the Federal Reserve Bank. The Fed is not funded by Congress, but instead by interest gained by the U.S. government. When there is money left over, the money goes to the United States Treasury. To avoid corruption within the Fed System, independent auditors are hired to investigate the Fed’s financial records yearly. The independence of the Federal Reserve from the branches of government helps to lessen corruption among government officials in determining things like how large the money supply should be. Because different political parties have very different ideological views about economics, it would be disastrous if the United States’ monetary policy was constantly changing to satisfy the whims of whichever party was in power at the time.

            It is evident that one of the Federal Reserve’s main functions is concerning monetary policy. But what is monetary policy? The Federal Reserve’s website defines monetary policy as “the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit as a means of helping to promote national economic goals” (FRQ: Monetary). Although the Federal Reserve as an entire body is seen as a figurehead for monetary policy, it is actually a specific group of people within the Fed called the Federal Open Market Committee that is most responsible for monetary policy. The Board of Governors, the Fed’s main people in charge such as Chairman Ben Bernanke, along with the presidents of the regional banks who serve on a rotating basis make up the FOMC. This Committee is responsible for buying and selling government securities and therefore aims "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." In addition to the FOMC, the Fed also controls monetary policy by discount window lending and reserve requirements.  

Works Cited

Frequently Asked Questions: Federal Reserve System. 7 Mar 2007. Federal Reserve Board. 14

Mar 2011. < http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm>.

Frequently Asked Questions: Monetary Policy. 28 Dec 2010. Federal Reserve Board. 14 Mar

2011. < http://www.federalreserve.gov/generalinfo/faq/faqmpo.htm>.

Summaries of Sources for Research Paper

This source, from the Federal Reserve’s website, talks about the history and main functions of the Federal Reserve. The Federal Reserve System, the central bank of the United States, was created with the Federal Reserve Act in 1913 and was intended to make the nation’s monetary system more safe and flexible, but its role has increased over time. The Federal Reserve has four main responsibilities: the monetary policy, the supervising of banks, the stabilization of the financial system, and the provision of financial services to both the public and private sectors. The Federal Reserve is centralized in Washington D.C. and has 12 regional banks throughout the U.S. The Board of Governors, the president of the Federal Reserve of New York, and the presidents of other banks who rotate positions make up the Federal Open Market Committee (FOMC). The FOMC is the main tool used by the Federal Reserve to influence market conditions. Although the Federal Reserve receives its authority from Congress, it is still considered independent because its decisions are not ratified by anyone and it does not receive Congressional funding. Therefore, politics are kept out of the Federal Reserve System and it is more difficult for corruption or ideological takeovers to occur. The Federal Reserve is funded mostly by interest gained by government activities and any additional money is returned to the Treasury. The Federal Reserve is required to report to the Speaker of the House at least once a year, and to the Congressional banking committees twice a year. Congress can also request members of the Fed to testify before them. Independent auditors audit the Fed’s financial records.

This source also comes straight from the website of the Federal Reserve. It is a question and answer page about how actions taken by the Federal Reserve affect the monetary policy, and therefore the economy, of the United States.  The monetary policy of a nation is determined by a central bank, for example, the Federal Reserve Bank in the United States, and is used to influence the amount and cost of money available in the market. The Federal Reserve uses the tools of open market operations, discount window lending, and reserve requirements in order to set monetary policy and influence the amount of money the U.S. has in reserves and the federal funds rate. These actions can eventually influence things like employment, interest rates, the amount of money and credit in an economy, and even the prices of goods and services. The Federal Open Market Committee, made up of the important people who work for the Federal Reserve, is in charge of setting the federal funds rate, which is the rate that one institution charges another for a sale of overnight funds available from the Federal Reserve. By altering this rate, the Fed can control things like economic growth and inflation rates. The Federal Reserve is also responsible for the money stock, which is the combination of money held by the public, banks, mutual funds, and other financial institutions. It can influence the money stock by changing the interest rates. The Fed is also responsible for setting the national discount rate every 14 days, which is the rate at which banks charge interest to each other for borrowing money.