The Role of the Federal Reserve

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Table of Contents

Introduction
Conducting Monetary Policy
Supervising and Regulating Financial Institutions and Activities
Promoting Financial System Stability
Fostering Payment and Settlement System Safety and Efficiency
Promoting Consumer Protection and Community Development
Conclusion
References

Introduction

Federal Reserve, otherwise known as the Federal Reserve System, is the United States central bank. It was created under Federal Reserve Act signed by President Woodrow Wilson in 1913. The act dictates its roles and responsibilities in the financial sector. The Federal Reserve is headed by a Board of Governors stationed in Washington DC, appointed by the president, and approved by the Senate. The Board is directly answerable to Congress, but it does not get its financing from the congressional appropriation. Despite Congresss involvement in setting goals for monetary policy, its mandate of the Board to make decisions on how they are achieved without seeking approval from the legislature or the executive. The Federal Reserve bank is responsible for conducting monetary policy, supervising and regulating financial institutions and activities, promoting financial system stability, fostering payment and settlement system safety and efficiency, and promoting consumer protection and community development.

Conducting Monetary Policy

Federal Reserve plays a critical role in the United States monetary policy by ensuring maximum employment and stability of prices across the United States. These policies impact the dollar exchange rate, stock prices, and interest rates, among other financial asset prices. The changes in these prices influence business and house decisions and thus affect investment, employment, spending, and production. The Board of Governors and the heads of the 12 Federal Reserve banks, collectively referred to as Federal Open Market Committee (FOMC), make monetary policies. They base their decisions on Gross Domestic Product (GDP), Consumer Price Index, inflation (CPI), global political stability, and lifting or imposing trade tariffs (Federal Reserve, 2021). To regulate the impact of these factors, the Federal Reserve responds by imposing policies to increase or reduce the flow of money in the economy.

During inflation, the Federal Reserve raises interest to help curb the adverse effects it might cause to the economy. This causes the prices of basic commodities to go up, thus making it unaffordable for the less privileged in society to purchase even food. The intervention positively impacts the economy but subjects other people in the community to suffering. According to Exodus 22:25, it is ungodly to charge high-interest rates. It is against imposing interest rates on a poor borrower struggling to repay the loaned amount. The Federal Reserve, on the other hand, should consider different ways of regulating inflation instead imposing high interests even on the poor.

Supervising and Regulating Financial Institutions and Activities

The Federal Reserve is mandated to monitor and regulate financial institutions and ensure that they operate within the provided principles. Moreover, it is responsible for identifying and evaluating potential risks to the financial system and the economy. The Federal Reserve issues guidelines regarding financial institutions acquisition, formation, and operations. It then follows up to monitor and ensure that institutions follow the guidelines to the latter. Some financial entities the Federal oversees are bank holding companies, state member banks, domestic financial holding companies, designated financial market utilities, foreign banking organizations operating in the U.S., and savings and holding companies. It supervises these institutions through examination and inspections, which involve evaluating risk management systems, compliance with applicable laws and regulations, and assessing the financial condition (Federal Reserve, 2021). In addition, it uses the risk-focused approach for consolidated supervision for companies with subsidiaries; it assesses the resources, activities, organization structure, and other deficiencies raising concerns to the parent company.

On the other hand, the Federal Reserve regulates financial institutions by issuing restrictive, prescriptive, or permissive guidance to supervised financial entities and ensuring they comply with these regulations. In the financial system, guidelines must be up to date to effectively respond to conditions and laws in the prevailing market to enhance safety in the supervised institutions (Federal Reserve, 2021). Federal Reserve must ensure financial institutions have adequate capital and proper planning, issue supervisory statements and guidelines, and oversight the banking system structure.

Promoting Financial System Stability

With the drastically evolving global financial systems, there is a need for Federal Reserve to promote financial stability in the United States. This will ensure financial institutions and services providers have demands they can adequately meet. While fostering financial stability, the Federal system effectively links savers and lenders with borrowers and spenders (Bernanke, 2017). Federal Reserve keeps the institutions and market structures resilient by monitoring risks such as asset valuation and risk appetite, funding risk, leverage in the financial institution, and borrowing by businesses and households in the financial system. In addition, it assesses the causes, effects, and remedies for economic instability in the country.

Fostering Payment and Settlement System Safety and Efficiency

The Federal Reserve facilitates secure financial transactions of the U.S. dollar across the country and even the global markets. It issues paper currency, processes credit and debit card transfers, collects debited checks and returns unpaid ones to the source banks (Automated Clearing House), and makes wholesale payments such as Fedwire Funds and Securities. In addition, the Federal Reserve regulates and supervises the payment systems, provides banking system liquidity, and explores and implements payment services improvement (Federal Reserve, 2021). It is a pillar holding the United States financial system and enabling swift local and international transactions.

Promoting Consumer Protection and Community Development

The Federal Reserves responsibility is to ensure consumer protection and community development through supervision and research on the impacts of policies and financial services in the market. It ensures financial institutions are compliant with the relevant consumer protection laws and fulfill community reinvestment laws and requirements (Federal Reserve, 2021). In addition, the Federal Reserve formulates and reviews regulations that enforce consumer protection, conducts rigorous analysis to understand emerging opportunities and risks, and engages stakeholders in enhancing effective consumer protection and community development.

It enforces consumer protection rules through written agreements with financial institutions, issuance of cease-and-desist orders, and ordering replacements for those affected by violations of particular regulations. Moreover, use customer feedback and complaints to identify and probe for a possible violation of consumer rights. It follows the issue and ensures it is addressed comprehensively, and the concerned financial institution initiates necessary reforms (Federal Reserve, 2021). The complaint can also be documented and used to inform policy formulation at a future date.

Conclusion

The Federal Reserve is responsible for conducting monetary policy to ensure maximum employment and stability of prices across the borders of the United States, even though some of the policies are overstepping biblical principles. Supervising and regulating financial institutions and activities is mandated to ensure they operate within the guidelines. Federal Reserve is the government agency that upholds the countrys financial stability. In addition, it facilitates payment and settlement system safety and efficiency locally and internationally, as well as promotes consumer protection and community development by ensuring customers rights are honored.

References

Bernanke, B. S. (2017). Federal Reserve Policy in an International Context. IMF Economic Review, 65(1), 132.

Federal Reserve. (2021). Board of Governors of the Federal Reserve System. Federal Reserve Board The Fed Explained.

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