The Federal Reserve or the Fed is considered
the central banking system of the United States. There are 12 in total on the
head of 12 Federal Reserve’s districts created under the Federal Reserve act of
1913. These banks are jointly responsible for the implementation of the
monetary policy established by the Federal Open Market Committee.
They are the latest institutions created by the
U.S. government to provide central bank jobs. Previous institutions included
the first banks (1791-1811), the second (1818-1824) in the United States, the
Independent Treasury (1846-1920) and the national banking system (1863-1935).
Many policy-related questions have arisen with these institutions, including
the degree of influence of special interests, balancing regional economic
concerns, preventing financial panic, and the type of reserves used to support
the currency.
Due to the financial disaster known as the 1907
panic threatened many New York banks with bankruptcy, a result that was avoided
by the arranged loans thanks to JP Morgan banker. While the confidence was regained
in the banking community inside New York by JP Morgan, but the panic reflected
the weaknesses in the U.S. financial system.
In other parts of the country, clearing houses
briefly issued their own banknotes for doing business. In response, the federal
government set up the National Monetary Commission to investigate options for
providing currency and credit in case of any panics in the future. The result
was the Federal Reserve System, which established several Federal Reserve banks
to provide liquidity to banks in different parts of the country.
The Fed opened in November 1914 and the first Chairman of the Federal Reserve was
an American lawyer called Charles Hamlin
serving from 1914 to 1916. The current Chairman is Jerome Powell, who was nominated
by the current U.S president Donald Trump On November 2, 2017.
Decision making board
The Fed is the national component of the
Federal Reserve System. The Board of Directors is made up of the seven
governors appointed by the President and approved by the Senate. Conservatives
serve for 14 years and overlapping conditions to ensure stability and continuity
over time. The President and Vice-President are appointed for a four-year term
and may be reappointed in accordance with duration restrictions.
The key responsibilities of the Board of
Governors are to direct monetary policy measures, analyze domestic and
international economic and financial conditions and lead committees that
examine current issues, such as consumer banking and e-commerce laws.
They also exercise extensive oversight of the
financial services industry, manage some consumer protection regulations, and
oversee the country's payments system, besides monitoring the activities of
reserve banks. They set reserve requirements for depositors and approve changes
in discount rates recommended by reserve banks.
The most important board's responsibility is
the Federal Open Market Committee (FOMC), which manages the American nation
monetary policy; the seven governors have a majority of votes on the FOMC,
while the rest comes from the Chairman to complete the total of 12 votes.
The Board finances its operations by evaluating
Federal Reserve banks rather than allocating them by Congress. Financial
accounts are audited annually by a public accounting firm, and are subject to
audit by the General Accounting Office.
How is the Federal Reserve Chairman nominated?
The Chair is nominated by the President of the
United States among the members of the Board of Governors, and serves for four
years after being confirmed by the U.S. Senate. The Chair may serve multiple
consecutive periods, awaiting the nomination and new confirmation at the end of
each period.
Impact Fed’s decisions on the economy
The Fed's mission is to maintain financial
stability throughout the stages of growth and contraction by adjusting interest
rates.
With the reverse relationship between the value
of money and Inflation, the Federal Reserve argues for an increase in interest
rates if inflation rate increases. During economic recession, the Fed intent to
cut interest rates to stimulate economic growth.
According to the Fed website, the manipulation
of interest rates "leads to a series of events affecting other short-term
interest rates, foreign exchange rates, long-term interest rates, the amount of
money, credit and, ultimately, the scope of economic variables including in
that employment, production and prices of goods and services."
As history is the best reference for
everything, as the early years before the creation of the Federal Reserve
showed the dual effects of uncertainty and panic caused by difficult financial
crises can lead to periods of economic chaos. Due to the most of the
stabilization effects of the Federal Reserve Act, those unstable periods have
become less common as the U.S. economy experienced periods of fast economic
expansion in the previous century.
What to expect from the Fed on Wednesday?
Monday's energy price hike helped add to the
feeling that the Fed may suddenly not be in a hurry to keep cutting interest
rates.
While markets continue to see the central bank
cut overnight lending interest rates by a quarter of a point at this week's
FOMC meeting, the situation of persistent cuts appears to have become weaker.
This came amid some changing economic trends as
well as inflationary pressures caused by a 14 percent rise in oil prices at the
beginning of this week. Rising inflation may prompt the Federal Reserve to
rethink about cutting interest rates since it may push inflation higher towards
target without any intervention.
On Monday, traders in the Federal Reserve
futures market were recording a 34 percent probability that the Fed would stand
pat on interest rates tomorrow, where the probability was zero a month ago and just
5.4 percent a week ago.