Evaluate the Role and the Effectiveness of the Federal Reserve in Stabilizing the Current Econom

1. Evaluate the role and the effectiveness of the Federal Reserve in stabilizing the current economy.

The Federal Reserve (FED) has four main duties; conducting the country’s monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system, and providing financial services to depository institutions (Federal Reserve Board, 2012). One could say that part of the financial crisis was due to the FED not supervising banking institutions, but banking institutions were only part of the problem in regards to the financial crisis of 2007 through 2009. Yet in term of reaction the FED to swift action to help the country avoid what was being called the next “Great Depression”.

The Fed, in combination with the U.S. Treasury, took vigorous action to deal with the financial panic. First, in the fall of 2008, under the Troubled Asset Relief Program (TARP), the Fed and Treasury began attempting to stabilize the commercial banking system by providing funds to banks in exchange for stock. Taking partial ownership a position in private commercial banks was an unprecedented move by the federal government (Hubbard, 2010).

Many banks were saved or for the interim avoid bankruptcy by being allowed to merge with other banks. Wachovia was allowed to merge and be bought by Wells Fargo creating more stability in the financial system as well as creating more stability for Wells Fargo (Hubbard, 2010). Other banks fell in similar situations as Bear Stearns Bank was swallowed up by JP Morgan Chase. The FED’s easing of its stance on bank mergers allowed for faith to remain in the financial system (Federal Reserve, 2012).

The Fed also modified its discount policy by setting up several new lending facilities. These lending facilities made it possible for the Fed to grant discount loans to financial firms such as investment banks that had not previously been eligible. In addition, the Fed addressed problems in the commercial paper market by directly buying commercial paper for the first time since the 1930s. Although the recession continued into 2009, the extraordinary actions of the Treasury and Fed appeared to have stabilized the financial system (Federal Reserve, 2012). Yet our economy is still on the slow tack to recovery as the flow of funds from savers to borrowers had not yet returned to normal levels but that can’t be blamed on the FED as a lot of our economy’s slow recovery has more to do with fiscal policy rather than monetary policy. Our current economic crisis is not due to lack of money.

2. Determine which economic indicators the Federal Reserve should analyze so it can better stabilize this particular economy.

There are two important variables and indicators could use to figure out how to better stabilize the economy, those being unemployment and inflation. The Fed tries to keep both rates low, but it