How the Federal Reserve Runs the Country

Essay by trevorbvUniversity, Master'sA+, August 2004

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The Federal Reserve System (The Fed) is the central bank of the United States. It was created by congress by the passage of the Federal Reserve Act in 1913. The Federal Reserve System is composed of the Board of Governors (in Washington D.C.), and twelve regional Federal Reserve Banks located in major cities (New York, St. Louis, Boston, Philadelphia, Kansas City, Richmond, Chicago, San Francisco, Minneapolis, Atlanta, Dallas and Cleveland) throughout the United States. Today, the Federal Reserves duties fall into four different categories: 1.) conducting monetary policy; 2.) plays a major role in supervising and regulating banking institutions and protecting the rights of consumers in regards to credit rights; 3.) maintaining the overall stability of the financial system ; 4.) providing miscellaneous financial services to foreign and domestic financial institutions, the general public and the U.S. government. The Federal Reserve Bank derives its authority from congress and is considered to be independent due to the fact that its decisions do not have to be ratified by anyone in the executive or legislative branch of the government including the President.

Income and expenditures of the Federal Reserve banks and the Board of Governors are not subject to the congressional appropriation process. The Fed's earnings come primarily from interest received on the Reserve Banks' holdings of U.S. government securities and from fees they charge depository institutions for providing services such as processing and clearing checks. Any net earnings are paid annually to the U.S. Treasury. In 2002 the Fed's net earnings equaled $24.49 billion. The Fed's actions have a significant effect on U.S. interest rates and, subsequently, on the stock, bond, and other financial markets.

One of the most powerful tools that the Fed has to control inflation and keep the economy in check is the ability to increase or...