Government is the most common formal leadership structure in modern states management. In that case, it is a factual assertion that citizens in such nations are aware of the functionality of respective governmental roles in relation to economic matters. However, it is unfortunate that majority of investors lack thorough understanding on the reasons as to why governments’ involvements in states’ economical affairs might affect them. For quite some time, the Federal Reserve (Fed) provides economic benchmark roles in the United States government.
Their main objective is to ensure provision of ultimate banking services to the U.S. government by designing policy regulatory measures suitable for the nation’s financial institutions. Since these roles have great impact on the State’s economical activities, relevant policy makers should find ways to strengthen the declining role of the Federal Reserve because a strong overall economic institution ensures proper safety of retail payment clearing, recession’s mitigation besides causing an increase in the volume of bank resources thereby making it possible to facilitate expansions of deposits.
The implication of good economic policy formulation is to cultivate a balanced equity culture to the Federal Reserve. As a result, there would be a smooth working environment coupled with consistency in economic service providence. Many economic analysts are in agreement with this view. For instance, economic research has proved that the impacts of monetary policies on equity base have a strong direct correlation to Federal’s performance index (Bernanke, et al. 2). This can be substantiated based on the uncertainties involved in Federal contractual engagements.
Therefore, the most initial strategy policy makers should adopt in order to strengthen declining role of the Federal Reserve is to ensure the safety of retail payment clearing. In “The Federal Reserve’s Reduced Role in Retail Payments: Implications for Efficiency and Risk,” Richard J. Sullivan explores the pertinent role of the United States’ Federal Reserve in ensuring retail debts settlements for the past decade. The reason behind huge non-cleared payments by the Reserve is financial incapacitation due to policy framework regarding fund allocations by the government to the Reserve. He further presents an in-depth analysis of the possible financial implication, caused by this action, to the Federal Reserve. In summary, it is possible for the Federal to stabilize its accounts as long as favorable policies are established and implemented. He further analyzes the reduction in the cost of check clearing which indicated that the payments system in the U.S. has undergone major negative shifts in the past ten years.
Utilization of paper checks has reduced significantly, substituted by the card payments and computerized clearinghouse. Checks being converted into electronic form before collection have signified that there are no paper checks being processed. Increased utilization of electronic payments has seen various private enterprises established due to the adjustment of the industry involved in processing payments.
More statistical details on Federal Reserve’s reduction in retail payments is provided. Federal’s Reserve share of retail payment clearance stood at 37% in 2000, a period when, as already mentioned, checks were being cleared using paper. The legislation had no reason to be worried about the reducing stake of retail payments clearance with the Federal Reserve. The reason of this decline, in share of retail payment by Federal Reserve, is due to in effective and impractical utility of credit and debit cards besides use of charge on check clearing, as from the beginning of this millennium. The weakened role of the Federal Reserve has caused resulted to many congressmen rising self-defensive complains as they have been settling about 20% of the retail payment that it clears. There are challenges that the settlement and retail payment industry encounter, and they can be categorized into four groups:
First, clearing and settlement is likely to become even more intense and less competitive especially, if the current state of affairs is left to thrive. Secondly, operational failures may become more common and harder to mitigate. Third, some socially beneficial options to manage operational risks may not be implemented; and finally, payments may be less likely to be settled safely. The challenge for policymakers is to apply strategies to limit further erosion of the Federal Reserve’s role in clearing and settlement and/or find other means to promote efficiency and safety in retail payments. (79-100)
Another alternative way policymakers should find to strength the declining role of the Federal Reserve is to control recession. In “Fiscal Policy verses Monetary Policy,” different contributors discuss what monetary policy is and what it does. Control in money supply by the Federal Reserve is what is referred to as the monetary policy. Objectives to be met through these policies are to maintain a relatively stable price in the economy and reduce the rate of unemployment or increase investor’s confidence within the state.
The monetary policy can be described in two folds, being either contraction-based or expansionary, the latter is meant to raise the money supply in the economy at a higher rate than normal, and the former is meant to expand the money supply slower than typical or even contracts it. It is important that the economic transformational duties of the U.S. Federal Reserve provide significant solutions to financial challenges encountered throughout the financial crisis of 2006-2010 (Chris 16). In addition, the Federal Reserve’s powers, some might say, have extended outside their conventional role of maintaining stable inflation and promoting growth. However, the Federal Reserve’s main goal since 2006 to mitigate inflation rates G. For high inflation to be regulated, in June there was 5.25% increase in the Fed Fund Rate, which the Federal Reserve oversaw. This had the effect of increased cost to businesses due to high interest, thus access to credit reduced. The housing market bubble then exploded eventually due to high interest rates.
The U.S. economy health in early 2007 had little causation in raising alarm of its performance. The Fed in January 2008 began on cutting the Fed Fund Rate to 2% being the rate in April purposely to cut on the pressure on credit. Development in areas that were doing well did have a positive impact on the U.S. economy in 2009 as companies were reporting on profits and the economy stabilized. The Fed was recognized for its effort by the National Bureau of Economic research in July 2009 in ending the recession (Chris 16).
Last way policymakers should find to strength the declining role of the Federal Reserve is to ensure possible expansions of deposits. The Federal Reserve ought to establish a more consistent way of retaining money into its accounts and avoid the temptation of cash imprints. This can be realized by enhancing short mechanisms money supply. In “How the Money Supply Is Regulated,” by the Congressional Digest argues about credit market and discount rate (Greider 17). The significant sector of the market for all services and goods: Specifically the credit markets are analyzed by the Federal Reserve.
Consumers need to finance doctor’s bills, houses, and automobiles: business needs for both long-term and short-term reasons: and government need for credit to finance the debts on its deficit budget; these are the three spending groups that demand credit. Saving of money that is held out of turned over to savings institutions and loan associations and current incomes are the two important sources of credit on the supply side, saving departments of commercial banks and insurance companies. The three users of credit have access to finance due to funds set out by the organizations. Commercial bank is another significant source of credit. If an individual observes keenly at the supply side of the credit of the credit then the initial item to notice is the basic disparity between the both sources of credit. The surplus supplying unit supply money to the deficit supplying unit, thus, the transfer of credit from lenders to borrowers.
Credit from the commercial banks then implies that they create new funds into the market. Discount rate provision is another factor that applies to monetary disbursements. Measures to be employed by the Federal Reserve to influence its monetary reserves are numeral. Enacting rates implications in discounts is the most favored form by the Federal Reserve. This is how the discount rate operates; commercial banks approach the Federal Reserve Bank and issue their note for a loan. The Federal Reserve Bank then credits the commercial bank’s account, thus, increasing its volume that the banks maintains with it and has an explanation for doing so:
When the bank pays off its note, its reserves are reduced and this restricts bank deposits. If the Federal Reserve wants to encourage an expansion of reserves, it will lower the discount rate to make it more attractive for banks to borrow.
An option to do away with the expansion of reserves is to increase the discount
rates in order to discourage banks’ borrowing from the Federal Reserve. (262-63)
The Federal Reserve is a bank of U.S. government, and it controls the country’s financial organizations. As mentioned in the beginning, Federal Reserve banking system’s main objective is to maintain the U.S. economic stability. Not many people are informed that there is a government, which works as guard for economy. Policymakers must find ways to strength the declining role of the Federal Reserve because a strong Federal Reserve ensures the safety of retail payment clearing, controls recession, and increases the volume of bank resources and makes possible expansions of deposits. The Fed should make effort to look over these economic factors in order to would facilitate the country’s economic sphere, hence, stability factor.
Celi, Chris. “Redefining Capitalism: The Changing Role of the Federal Reserve Throughout The Financial Crisis (2006-2010).” Inquiry (University Of New Hampshire) (2011): 15-20. Academic Search Complete. Web. 11 June. 2014.
“Fiscal Policy vs. Monetary Policy”. Diffen contributors. Diffen LLC, 2013. Web. 13 Apr. 2013.”How The Money Supply Is Regulated.” Congressional Digest 38.11 (1959): 262-288. Academic Search Complete. Web. 12 June. 2014.
Bernanke, Ben S., and Kenneth N. Kuttner. “What explains the stock market’s reaction to Federal Reserve policy?.” The Journal of Finance 60.3 (2005): 1221-1257.
Greider, William. Secrets of the temple: How the Federal Reserve runs the country. Simon and Schuster, 1989.
Sullivan, Richard J. “The Federal Reserve’s Reduced Role in Retail Payments: Implications for Efficiency and Risk.” Economic Review (01612387) 3 (2012): 79-106. Academic Search Complete. Web. 6 June. 2014.