MeganCookWeek 5 HomeworkRole of the FED

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Role of the FED Megan Cook BA4920 Macroeconomics GE3510 Professor Geoffrey VanderPal Charter College 12/24/2023

Abstract The Federal Reserve System (FED) plays a crucial role in the United States economy. It carries out various functions and responsibilities aimed at ensuring monetary stability, regulating banks, and maintaining overall financial stability. Understanding the role of the FED is essential in understanding how it influences economic depressions and recessions.

One of the primary functions of the FED is to conduct monetary policy. It has the authority to control the money supply and interest rates, which can have a significant impact on the economy. By adjusting interest rates, the FED can influence the borrowing and spending behavior of individuals and businesses. This allows it to stimulate economic growth or slow down inflation when necessary. The FED also plays an important role in regulating banks. It oversees the operations of commercial banks, ensuring that they are financially sound and following legal banking practices. Depressions and Recessions The Federal Reserve System (FED) these important roles in managing the U.S. economy, particularly during periods of economic depression. The Great Depression of the 1930s was one of those occurrences. “The Great Depression was initiated due to relatively tight monetary policies of central banks around the world that resulted in negative aggregate demand shocks, both domestically and across gold standard economies.” (Hawtrey 1947; McCloskey and Zecher 1984; Glasner 1989; Eichengreen 1995; Irwin 2012; Sumner 2015). During this time, the FED faced significant challenges and had a profound impact on the country's economic stability and workings. In response to the Great Depression, the FED implemented several actions to address the severe economic downturn. The most effective implementation was the reduction of interest rates to stimulate borrowing and investment. As stated by Philadelphia Fed governor at the time George Norris, “We have been putting out credit in a period of depression, when it was not wanted and could not be used” (Friedman and Schwartz [1963] 1971, 373). However, these efforts were not sufficient to stabilize the economy, as the FED also faced limitations, such as the constraints of the gold standard at the time.

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The Federal Reserve System (FED) also plays a vital role in managing recessions in the United States. The FED's made a great impact on the Great Recession of 2007-2009. During this period, the FED implemented various measures to address the economic downturn and stabilize the financial system. To combat this Great Recession, the FED employed both conventional and unconventional monetary policy tools. At first, they lowered the federal funds rate, which is the interest rate at which banks lend to each other overnight. By reducing this rate, the FED aimed to bring a catalyst on borrowing and investment, thereby boosting economic activity. These measures had mixed results. While they helped stabilize the financial markets and prevent a complete collapse of the banking system, the impact on the broader economy was limited. The recession continued, and unemployment rates were rising. This highlighted the challenges faced by the FED in managing recessions, as its tools primarily influence financial markets and may take time to trickle down to the real economy. The FEDs have also implemented stricter regulations and stress tests to ensure the stability of the banking system. Conclusion The FED's role in managing economic crises cannot be understated. It has the potential to affect the economy during depressions and recessions. However, it is essential to continually evaluate and refine its strategies to ensure its effectiveness in maintaining financial stability and promoting sustainable economic growth. Looking ahead, the FED faces ongoing debates and challenges. “New or old, the ideology guiding monetary policy has moved that policy into uncharted waters. It is unclear whether there is a limit to the level of support that the Federal Reserve will provide to the U.S. Treasury.” (Caton 2023). The effectiveness of its policies and the appropriate balance between regulation and intervention continue to be subjects of

discussion. Additionally, the FED must adapt to the changing economic landscape, including technological advancements and global expansion.

Resources Caton, J. (2023). Crisis and credit allocation: The effect of ideology on monetary policy during the great depression and the great recession. The Independent Review, 27 (4), 485-510. Retrieved from https://www.proquest.com/scholarly-journals/crisis-credit-allocation-effect- ideology-on/docview/2883033029/se-2 Great Recession - Definition, Cause & 2008 | HISTORY. (2017, December 4). HISTORY . https://www.history.com/topics/21st-century/recession Hawtrey, Ralph. 1947. The Gold Standard in Theory and Practice. London: Longmans, Green and Co. Hayes, A. (2022, November 14). How the Federal Reserve Fights Recessions . Investopedia. https://www.investopedia.com/financial-edge/0912/how-the-federal-reserve-fights- recession.aspx Hayes, A. (2023, October 4). Federal Reserve System: What it is and how it works . Investopedia. https://www.investopedia.com/terms/f/federalreservebank.asp#:~:text=The%20Federal %20Reserve%20System%20is%20the%20central%20bank,Reserve%20Banks%2C %20and%20the%20Federal%20Open%20Market%20Committee. Rich, B. R. (n.d.). The Great Recession . Federal Reserve History. https://www.federalreservehistory.org/essays/great-recession-of-200709 Friedman, Milton. 1968. The Role of Monetary Policy. American Economic Review 58, no. 1: 1–17.

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