Federal Reserve's Role In The Economy
The Federal Reserve's role in the economy can be expressed by any of the three following metaphors: the Fed as a mechanic, a warrior, or a fall guy. Interestingly enough, the Fed can be all three at same instance. It really depends on what is happening in the economy at the time, what the Fed's role is at the moment, and the observer's perspective. Let's take a closer look at each metaphor and the circumstances under which it applies.
A mechanic is someone that repairs and maintains machines. This section describes the Federal Reserve's (Fed) role as a mechanic who repairs and maintains the nation's economy "machine". Any auto mechanic will tell you that maintenance as well as major service is necessary to keep an automobile running smoothly and efficiently. There may still be unexpected breakdowns, but the repairs are usually less costly if regular maintenance is done. The same is true for our economy.
The Federal Reserve System consists of 12 Federal Reserve banks located across the nation. These banks act as central bankers for privately run banks within their region. They also supervise and regulate private banking institutions for the benefit of the economy.
In order to explain the Fed's role as "mechanic" we must understand the services (maintenance) routinely performed to keep the economy running smoothly. Policies of the Fed are determined by the seven-member board of Governors appointed by the President and confirmed by the Senate. The Federal Open Market Committee (FOMC) is a key division of the board that consists of all seven governors and 5 out of the 12 regional reserve bank's presidents. They make the decisions regarding monitory policy.
Conducting the nation's monetary policy is critical to ensuring a healthy and growing economy. The Fed has to watch the economy closely to ensure that the nation's money supply is balanced for the current economic climate. If there is too much money available, the...
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