Analysis and Purpose of the Federal Reserve and Its Impact on the United States Economy, Essay Example

The institution that sets the United States monetary policies in order, to promote maximum employment, stable prices, and moderate and long term interest rates, is called the Federal Reserve, and economically, this country has always been impacted positively or negatively by the actions of this Board of Governors, its Chairman and financial experts, ever since the enactment of the Federal Reserve Act of 1913 (Federal Reserve, 2012).

When the Federal Reserve sets its objective to achieve stable prices, it is hoping to maximize sustainable output growth and employment, as well as moderate and long term interest rate, so that goods and services, materials and labor can become unaffected by inflation, appropriate allocation of resources are effected, and general improvement in the standard of living of the population can be replicated throughout the national environment (Federal Reserve, 2012)

According to the Federal Reserve Board (2012), this act of Congress created entity, in addition to its monetary policies, has regulatory and supervisory responsibilities over banks that are members of the system, bank holding companies, international banking facilities in the USA, foreign activities of member banks, Edge Acts and agreement corporations, and finally the US activities of foreign–owned banks.

Financial institutions which are engaged in the use of credits for purchasing or carrying securities, according to the Federal Reserve Board (2012), have to be guided by the margins requirements established by this Federal Reserve, which is also responsible for the smooth functioning and continued development of the nations vast payment systems.

In terms of impacting the lives of the normal citizens of the United States and the economy in general, the Federal Reserve plays a significant role because of its responsibility to develop and administer regulations that implement major federal laws that governs consumer credits such as the Truth in Lending Act, the Equal Credit Opportunity, the Home Mortgage Disclosure Act, and the Truth to Savings Act.

A crucial role is therefore played by the Federal Res3eve in maintaining the economy of the United States, especially in terms of regulations and monetary policies, which serves to guide how daily transactions are conducted as they relate to selling and buying decisions, recruiting, laying off or terminating workers, customers knowing how and where to successfully access credits to make life changing purchases, which include buying houses, cars or staring their town business.

     Monetary policies announced by the Federal Reserve in a timely manner provide valuable information for business to conducting their forecasting and planning activities, which will involve where, how, and how much they can invest and market their products, buy shares, plan inventory buildup and distribution, as well as decide who to employ to help influence legislative authorities to enact laws that will make their business activities more successful.

These cumulative effects of these activities will impact the economy in terms of low or high inflation rates, increase or decrease in employment, economic booms, stagflations or absolute economic collapse, depending on the forecasting, moral suasions and other econometric parameters used by the Federal Reserve, and how they are received and acted on by the major players in the markets.

Additionally, when the Federal Reserve establish medium and long term interest rates that it will impose on the US economy, this will affect Foreign Direct Investment (FDI) in the country, with many companies seizing the opportunity presented by one of the most attractive markets in the world to finance business, buy treasury bonds, conduct different types of takeovers that will increase their profit margin, as well the employment levels in the country levels and standard of living in the country.

The US Government can also positively the growth of the economy, in light of the Federal Reserve interest rates commitment, by providing additional incentives to foreign direct investment activities, by offering tax breaks to companies that employ and train certain categories of workers, as well as bringing in new technology into the country..

A significant offshoot of actions by Federal Reserve announcements and foreign direct investment will be the increase the country’s GDP and consumer spending, as result of higher employments rates and growing consumer confidence. This in turn will drive banks to further lower their interest rates and provide the impetus to more business entrepreneurs to access credit to start their business.

The access to low interest loans will enable business of all categories to expand their production facilities, allocate higher percentages of heir revenues to research and development,  identify and implement new technologies, train more workers, offer lower price goods on the local and overseas markets, and establish competitive advantages that will drive down consumer prices while increasing sales revenues.

Decisions by the Federal Reserve will also indirectly impact employees and investors, in that the successful local and foreign companies operating in favorable climates will be able to raise employees salaries, promote more workers, increase hiring, offer excellent benefits, pay excellent bonuses, as well as provide higher earnings per share (EPS) on their share price and declare healthy dividends to shareholders at annual meetings.

The United States Internal Revenue Service (IRS) benefit from the monetary, fiscal, and regulatory practices pursued by the Federal Reserve on an annual basis, in that the different banks that offer attractive lending rates to their customers will generate higher profit margins, which in turn will force them to pay higher taxes to the IRS. A similar situation is also applicable to local, national, multinational and global organizations.

Communities that are suffering from the closure of companies in their locale, can also be positively impacted by the Federal Reserve policies and practices, in that those that are strategically located to shipping and transportation routes as well as universities and other training institutions, will be able with the assistance of government incentives, to attract companies to open businesses which will spur employment and increase the standard of living of the local population.

In addition to companies entering communities, new job opportunities that becomes available, will attract unemployed persons in other states to relocate in pursuit of better standards of living. Increase in  population of any community, will bring pressure on local authorities to provide basic amenities like water, light, energy and power, but this will be offset by the higher levels of revenues generated, which will enable them to expand their capabilities.

The Federal Reserve in time of economic crisis can also come to the help of the country, in that it will lower interest rates further, reduce the amount of money banks have to keep to remain solvent, offer, relax regulatory instruments, and purchase financial instruments like Treasury bonds that will expire several years in the future, to increase  liquidity in the environment, so that banks can continue to make funds available to business that are having cash flow, debt servicing, raw materials acquisitions, overhead expenses, and other financial problems.

Economic bust also brings unstable process, higher unemployment, low capital injection, outsourcing of jobs top more favorable markets, higher interest rates, high bankruptcy rates, slump in retails, construction , housing and manufacturing sector activities, as well as consumer confidence in the market.

The Federal Reserve team would be required to proactively see these events and intervene to change the landscape, especially when it is their power to do so, but activities in like debt defaults, stock market crash, bank failures government collapse, and riots in external markets like Europe and Asia as well as national disasters and wars, are beyond its control and can reduce the institution’s ability to effect the timely prescriptions that will bring about economic revival.

However, despite these limitation, it could be argued with a great deal of objectivity using empirical data gathered from reliable institutions, that the Federal Reserve, whether over the medium or long term, by means of its monetary and fiscal policies, and regulations implemented and supervised, has always significantly impacted the economy of the United States, as well as the investment actions of foreign companies and governments in the past and will continue to do  in the foreseeable future.


The Federal Reserve Board, (2012). The Structure of the Federal Reserve System Retrieved from on 02/01/12

The Federal Reserve (2012). Monetary Policy and the Economy The Federal Reserve System: Structure and Purpose Retrieved from: on 02/01/12