In the year 2018, Jerome Powell took the Chairmanship of the Fed or the Federal Reserve System under the leadership of President Donald Trump in the US. Jerome Powell belonged to the private sector and was appointed based on policymaking or academic background. Below are the three major tools of the Federal Reserve System.
- Reserve requirements- The money the bank requires its user banks to retain in its vaults overnight is called the Federal Reserve. Federal Reserve aims to protect the banks and their users in conducting its operations. Federal Reserves are utilized by the central bank to channel the supply of wealth in the country and hold the rate of interest.
- Open market operations (OMP)- When the central bank buys or sells securities openly in the market to control the supply of money. The Federal Reserve System uses OMP to alter the rate of interest such as federal funds rate in the case of interbank loans. Buying securities helps in adding funds to lower interest rates and add money to the banking system. It then helps us to obtain the loans conveniently and enhance economic activity. Simultaneously selling securities raises interest rates, and pulls out funds from the banking system resulting in lethargic economic activity and more expensive loans. Banks sell open market securities to clear their balance sheet.
- Discount rates– These are the rates the depository institutions and central banks charge the commercial banks on the loans received from the facility of the Regional Federal Reserve Bank. The discount rates change to eight times in twelve months. This rate is calculated in terms of a percentage point on top of the rate of the federal funds. This is done intentionally to motivate banks to lend money to each other.
Under his chairmanship, Jerome Powell Guides the Federal Reserve System to effectively-
- Implement the monitory policy
- Lowering the rate of interest
- Regulate the banking system in the public interest
- Introducing the asset purchase program
- Maintain a stable financial system, and
- Strengthening the capabilities of households and businesses to borrow funds during the COVID-19 pandemic (such as the Municipal Liquidity Facility and the Main Street Lending Program).
Powell plays a significant role in channelizing the economy of America & the financial health of its citizens. Powell faced a lot of challenges during his journey during the COVID-19 pandemic, the trade war with China, and the volatile stock market. Under Powell’s leadership, several changes have been made to strengthen the economy.
Powell has introduced accessibility and transparency in the Federal Reserve System. However, he is always criticized for not helping ordinary Americans. Some have also criticized him for showing concerns about the long-term consequences of FRS’s actions, specifically in the case of its capabilities to cope with inflation and its wide asset purchase program. Despite all this, Powell has adopted several measures to contribute to the economy, such as advocating greater accessibility and transparency, introducing lending facilities, and lowering interest rates.