Wednesday, November 29, 2023

Federal Reserve Bank and its Impacts on Global Economy

The Federal Reserve, commonly called the Fed, is the central bank of the United States and it has been prevailing for more than a century. The Fed was created in 1913. A sequence of financial panics, especially the panic of 1907, resulted in the aspiration for central control of the monetary system to ease financial crises, and the Federal Reserve Act of 1913 was then enacted.

For monetary policy in the Federal Reserve Act, the U.S. Congress introduced three crucial goals: to maximize employment, stabilize prices, and moderate long-term interest rates.

Over the years, the powers and purpose of the Federal Reserve have been expanded with the enactment of legislation by Congress. Today, the Fed legislates monetary policy to maximize employment, manage inflation, and stabilize interest rates, in addition to supervising the banking system.

Although the board members of the Fed are appointed by Congress, the Fed’s structure is designed to operate independently of political influence.

What Are The Functions Of The Federal Reserve?

Manage Inflation:

The Fed manages inflation while endorsing maximum employment and steady interest rates. This is the most noticeable function of the Fed.

Supervise The Banking System:

The Fed oversees and regulates the largest banks of the nation and passes laws to safeguard consumers.

Maintain The Stability Of The Financial System:

The Fed provides the stability of the financial markets and limits potential crises.

Provide Banking Services:

The Fed offers certain financial services to other banks, the U.S. government, and foreign official institutions.

Impacts on The Global Economy

One of the most significant tasks of the Federal Reserve is deciding the federal funds target rate. This is the interest rate for overnight loans, which banks charge one other. The federal funds target rate acts as a standard for various short-term interest rates like rates applied for savings accounts, short-term bonds, and money market accounts. It also acts as a source for the prime rate. The Fed draws on the federal funds target rate as a way to motivate economic growth through the Federal Open Market Committee (FOMC), which is responsible for establishing U.S. monetary policy.

To inspire the economy, the Fed reduces the target rate. If interest rates are kept low, the belief is that consumers can borrow more and thus, spend more. For example, lesser interest rates on home mortgages, car loans, and credit cards make them more manageable to consumers. Lesser interest rates frequently weaken the value of the dollar in comparison with other currencies. A weaker dollar signifies some foreign goods are more expensive and consumers are likely to buy goods made in the USA. Improved demand for goods and services habitually boosts employment and wages. This is effectively the option the FOMC took after the 2008 financial crisis to stimulate the economy.

Alternatively, if consumer prices are increasing too fast (inflation), the Fed increases the target rate, making money more expensive to borrow. As loans are difficult to get and more costly, consumers and businesses are less prone to borrow, which slows economic development and causes inflation.

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