Question

The Federal Reserve System (called “the Fed”) serves at the Central Bank of the United States. It is responsible for setting and carrying out monetary policy. Congress established the Fed and allows it to operate autonomously, at least with respect to setting and carrying out monetary policy on a day-to-day basis. This autonomy allows the Board of Governors and the Federal Open Market Committee (FOMC) to quickly respond to economic and financial industry problems and take timely action. It also moves policy making out of politics, because members of the Fed’s Board of Governors are appointed for 14 year nonrenewable terms.

Explore the Fed’s website,

http://www.federalreserve.gov/

and the roles of the Federal Reserve, listed in the website below.

https://www.federalreserve.gov/aboutthefed/pf.htm

Then provide a discussion on the roles of the Federal Reserve you find are most important and why? What would happen if the Federal Reserve did not carry out these roles?

Answer 1

Most important roles of federal reserve.

1) To control the monetary policy - federal reserve sets the interest rates and therefore determines the output/inflation trade off.

2) To act as government's bank - fed prints currency to finance government deficit and also organises treasure sales.

3) Lender of last resort - this role was well played by Fed during GFC, where it was instrumental in arranging/financing the bail out of badly hit banks.

4) Issue of Currency - fed is reposnsible for world's reserve currency i.e. the USD.

If Fed did not carry out these roles then

1) Currency issuance would slip out of control, and USD will lose its economic sanctity

2) Inflation would spiral out of control leading to money becoming a worthless instrument

3) US government will not be able to arrange borrowings.

4) Banks will not have a regulator and will engage in scrupulous business activities.