What is the Federal Reserve and what does it do?

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The Federal Reserve — or “the Fed,” as it’s commonly called — is the central bank of the United States. Generally speaking, a central bank is a large, centrally controlled bank that’s in charge of a country’s interest rates, money supply, and banking system.

The U.S. Federal Reserve was created by the Federal Reserve Act of 1913, legislation that was enacted mostly in response to a series of financial panics. The Fed is charged with three main objectives: maximum employment, stable prices, and moderate long-term interest rates (the first two objectives are often referred to as the Fed’s “dual mandate”). Over the years, the Fed’s duties have expanded and evolved to include maintaining stability of the entire U.S. financial system.

How is the Fed organized?
The Fed isn’t a single entity. It actually consists of four parts: (1) the Board of Governors, (2) the Federal Open Market Committee, (3) 12 regional Federal Reserve Banks, and (4) thousands of smaller member banks.

The Board of Governors — also called the Federal Reserve Board — is at the top. It consists of seven people who are nominated by the President and approved by the Senate. Each person is appointed for a 14-year term (terms are staggered, with one beginning every two years).

The Chair of the Board of Governors — perhaps the most visible face of U.S. economic and monetary policy — is currently Janet Yellen, the former president of the Federal Reserve Bank of San Francisco. Dr. Yellen is the first woman to hold this post.

The Federal Open Market Committee (FOMC) is responsible for setting U.S. monetary policy. The FOMC is made up of the Board of Governors and the 12 regional bank presidents. While all FOMC members discuss and debate economic policy, only 12 members have voting rights: all 7 Board of Governors members and 5 regional bank presidents.

There are 12 regional Federal Reserve Banks that are responsible for typical day-to-day bank operations. The banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Each regional bank has its own president and oversees the thousands of smaller member banks in it region.

So what does the Fed actually do?
One of the Fed’s main functions is to set U.S. monetary policy. It does this primarily by: (1) setting the discount rate, which is the internet rate the Fed charges commercial banks on money it lends; (2) setting reserve requirements, which is how much a bank must hold in reserves; and (3) overseeing open market operations, which is the purchase and sale of government securities on the open market.

People often look to the Fed for clues on which way interest rates are headed. Another reason is economic analysis and forecasting. Members of the Federal Reserve regularly conduct economic research, give speeches, and testify about inflation and unemployment, which can provide insight about where the economy might be headed. All of this information can be useful for consumers when making borrowing and investing decisions.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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