Federal Reserve Benefits

In today’s economic times of futility, the Federal Reserve of the United States has been rising in prominence in the media and news. But what exactly does the Federal Reserve do and what is its role in the country’s economy? The Federal Reserve is actually a more recent addition to the country’s economic system and is in fact something that the Federal Government fought against for a long period of time. The Federal Reserve had to go through a tough process to be implemented, but has been standing ever since. The powers and abilities of this institution are extensive and while some feel that consolidating the nation’s economic power in one institution is beneficial, a look at the process and structure of the Federal Reserve shows that while
The Federal Reserve System or the Fed was established by Congress in 1913 after a long and arduous fight to have the Fed’s plan approved. The seeds of the Federal Reserve were sown after the Panic of 1907 lead to the failure of several banks and left Americans looking for a way to change their banking system. Soon after, the National Monetary Commission was created with the task to explore to options of a potential banking reform. This commission had 18 members tasked with finding the problem areas of the banking system and suggesting changes to fix them. The most prominent member of this commission was Senator Nelson Aldrich who many people viewed as the leader of the rich and conservative Americans (Johnson 2010). Senator Aldrich’s position among the elite made the general public skeptical about the true motives of his ideas. Aldrich’s main opposition came from the Progressives who wanted to make the banking system less powerful than it already was. When the first plans of reform, in the aptly
Discount rate is another way of saying interest, so in other words the Fed is also in charge of determining the nation’s interest rates. The changing of the discount rate can lead to drastic effects on the economy. When the discount rate is cut, the banks borrow more from the Federal Reserve and obtain more credit to lend out. On the other hand, a raised discount rate will tighten the banks up and they will be less hesitant to borrow money from banks. This is the way that the Federal Reserve functions as a “lender of last resort.” It was by the tactic of lowering the discount rate, did the Federal Reserve try to boost the economy following the September 11 Terrorist Attacks. In fact the Fed actually cut the discount rate eleven times in 2001 (Ginsberg, Lowi and Weir 2009). The raising and lowering of the discount rate is also a tactic that the Fed uses to fight inflation. Raising the discount rate decreases spending and can lead to a recession. To combat the recession, the Fed can lower the discount rate and make bank loans more available. This will raise the spending level and hopefully restore the economy to normal levels. However, an excessive decrease of the discount rate makes too much money available and can lead to inflation. If there is inflation present, raising the discount rate can help to temper spending and end inflation (Brue and McConnell 2005). When inflation was rampant in the