History Of The Federal Reserve

Here is a guide to the history of the Federal Reserve; a very important section of our government.

Established by congress in 1913, The U.S. Federal Reserve was designed to present the country with a more secure, more elastic, and more stable economic and financial structure. Presently, the Federal Reserve is in charge of the nation's monetary policy and oversees the regulation and management of banking institutions. Other duties include protecting consumers' credit rights, maintaining the solidity of the financial system; and providing a variety of economic services to the government and the people, as well as banks both at home and overseas.

One of the main responsibilities of the Federal Reserve System is to regulate the money supply so as to keep production, prices, and employment stable. The reserve requirement, or the percentage of money that banks are not allowed to loan out, when lowered, requires banks to keep less money. Consequently, more money is put out into circulation. However, when the reserve requirement is raised, banks may have to collect on some loans to meet the new reserve requirement

Alan Greenspan became Chairman of the Board of Governors of the Federal Reserve System on June 20, 1996. He was recently nominated by President Clinton and confirmed by the Senate for a fourth four-year term. Under Greenspan's direction, The Federal Reserve has raised interest rates by a quarter-point nearly a half a dozen times in 1999. The primary reason given for these hikes is that they will help to slow the economy and prevent uncontrollable inflation. The increase was implemented by selling short-term securities to banking institutions, drawing off finances from the banking system and as a result, making money more expensive to borrow. The premise was that by increasing borrowing costs, consumer and business borrowing and spending activities would wane, which would in turn, extend the recovery period of the economy.



One of the most notable consequences of the interest raise was that banks began to accordingly increase the prime rate charged to clients in an attempt to make up for the added expense of having to pay extra to borrow from one another. The banks' increases, which equaled The Federal Reserve's quarter-point increase, were then forwarded to consumers in the shape of higher loan rates.

In regards to the new millennium, it is predicted that the negative pressure on consumer spending will be somewhat offset by the continued expansion of payrolls and real wages in the short term, which will keep disposable income growth rates at around the 4.8% level that they have been hovering at in recent years. If the Federal Reserve does satisfactorily reduce interest rates, it would reinvigorate the economy by encouraging banks to lower their prime lending rates, which would translate into lower interest payments for consumers and businesses. Regardless of the outcome, it is expected that the strong growth in domestic demand will stabilize around the 2% range in the year 2001.

The economy has continued to bounce back from the higher borrowing costs and there is not much evidence that they are hurting consumers too badly. Still, the rapid and repeated increases have some policymakers "shaking in their shoes" due to fears that demand will outpace supply and subsequently cause economic disaster.

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