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>.
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