Federal Reserve (FED) Bank of America

Federal Reserve (FED) Bank of America

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The FED is the fundamental system of banking in the U.S. The Federal Reserve was formed in 1913 where the Federal Reserve Act was endorsed. The formation of the FED was aggravated by financial crises in the United States. The Congress hence decided to create the central bank of the U.S. and the FED as a precautionary measure to the financial crisis. The Act behind its creation was composed of three main objectives: to achieve sufficient employment level, to attain long-term and steady rates of interest as well as steady prices. The first and the third goals of the act are more accentuated. The FED has undergone many changes to cover emerging economic issues such as inflation crises in 1977 and need for consumer protection after the 2007/ 2008 financial catastrophe (cited in Hubbard & Brien, 2014).

According to Hubbard & Brien (2014, p. 533), FED conducts its activities independently without any influence by the U.S. government. The decisions made by FED are autonomous. FED, however, derives its powers from the Congress. The FED in the US performs the monetary policy in the economy. It is also involved in supervision and regulation of the banking sector in the U.S. FED is also concerned with ensuring steadiness of the financial structure as well as offering financial service to the government, foreign organizations, and depository organizations. FED supports banking system in the U.S. through stringent monetary regulatory measures. It is involved in determining the ratio of reserves that bank institutions should keep in relation to their deposits.

FED has three tools of monetary policy. The first involves defining the required reserve needs for commercial banks. This is where commercial banks are required to hold part of their deposits without lending it out. The next policy involves operation of the discount window. This is where banks are needed to maintain a specific amount of reserve amount each day. The last policy involves performing open market operations. This is where the FED physically increases or reduces the supply of money in the economy through buying or sale of bonds (cited in Hubbard & Brien, 2014).

The bank increases the money supply through lowering the interest rates. This will hence lead to high quantity demand for money which also causes high investment. This will lead to high amount of money generated leading to inflation. A discount loan is where loan interest and financing expenses are subtracted from the initial loan amount when the loan is awarded. The discount rate is the amount of interest subtracted from the principal loan amount awarded to commercial banks or other financial institutions by the central bank. Excess reserves are reserves held by banks in excess of the required amount. The required reserve ratio is the proportion of deposits the commercial banks are required to hold in cash basis by the central bank. On the other hand, the required reserve is the amount the commercial banks are demanded to hold at Federal Reserve banks (Hubbard & Brien, 2014, p. 586).

According to Hubbard & Brien (2014), bank panic is constant withdrawal of money from a certain bank by its depositors due to speculation that the bank may be closed. A bank run on the other hand is massive withdrawal of funds from the bank by account owners while citing insolvency of the bank. A bank panic happens when the account holders looses trust with the bank and are skeptical of the bank’s long-term operation hence they withdraw all their money. The latest bank panic in the U.S. happened in the year 2011 when the government violated the debt ceiling. One item I found interesting in the chapter was the response of Fed to the 2008 economic crisis. I was impressed by how FED applied unconventional means to tackle the crises. In the current economy, FED should for example induce banks to increase the loan interest rates. This would help to ease the gradually increasing inflation since 2012.

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