The Federal Reserve System Facts

federal reserve

Introduction

The Federal Reserve or simply the "Fed" is the United States central banking system.

As a result of a series of financial panics, the Federal Reserve Act was enacted on December 23, 1913, with the goal of resolving financial crises through central control of the monetary system. The Federal Reserve System has expanded its roles and responsibilities as a result of events such as the Great Depression in the 1930s and the Great Recession in the 2000s. Today it is one of the most powerful central banks in the world.


Federal Reserve

Fact #1: The Federal Reserve is one of the most powerful central banks in the world

In order for the US economy to function smoothly, the Federal Reserve has many important responsibilities. Such as but not limited to: raising or lowering interest rates, to achieve price stability, economic growth, and maximum employment. Since the Federal Reserve has been around for over 100 years and represents the largest economy in the world, it is no surprise that it is arguably the most influential central bank in the world.

Global investors closely follow the comments of the Fed's Governor, since changes in US monetary policy can have profound implications for the rest of the world.

Increased interest rates in the US, for example, often affect borrowing costs in other countries around the globe. Global economic factors include the value of the dollar as well: Since oil, gold, and other commodities are traded in dollars, any change in the dollar's value directly affects global producers of those goods.

Furthermore, currency fluctuations can increase the liability of countries that owe US dollar debt repayments. The Fed has the power to affect the value of the dollar against other major currencies through its actions and operations. For instance, a rise in interest rates often leads to an increase in capital flows to the US and an increase in demand for dollars.

Fact #2: The Federal Reserve System consists of many banks

There are 12 regional Federal Reserve banks in the Federal Reserve System, with the main headquarters in Washington, D.C.

Boston, New York City, Philadelphia, Cleveland, Richmond, Chicago, St. Louis, Atlanta, Kansas City, San Francisco, Minneapolis, and Dallas are among the regional branches of the Federal Reserve.

Despite the fact that each regional Fed branch oversees operations on its own location, the NY Fed is considered the most influential regional bank since it implements the FOMC's decisions.

Fed

The Board of Governors oversees the entire network of Federal Reserve branches. While regional branches only serve as the operational arm of the central bank, they are an important component of the Fed System from a regional perspective.

Fact #3: Three main objectives guide the Federal Reserve

Its primary purpose is to control inflationary pressures, promote maximum employment, and support economic growth. Adjusting interest rates is the Fed's main tool for achieving its goals. An economy that is showing signs of weakness and inflation rates that are below the Fed's target (usually around 2%) can be lowered to promote spending, investing, and economic growth by lowering interest rates.

In similar fashion, when the economy is doing well and inflation rates start rising above the Fed's target, the central bank can hike interest rates. Borrowing becomes more expensive, economic activity decreases, and prices increase less. Additionally to interest rates, the Fed can engage in Quantitative Easing, which consists of buying government securities and increasing the money supply.

Fact #4: The Fed does not print money.

Contrary to popular belief, the Fed does not control money creation. In spite of the fact that the central bank can influence the money supply (and does), actual money is printed by the U.S. Treasury.

The US Treasury oversees the US Mint and the Bureau of Engraving and Printing, which print all US paper currency and coins. The US Treasury is responsible for putting the money into the domestic fiscal system.

Private banks are responsible for creating money through lending. The Federal Reserve doesn't directly control loans issued by private banks, but it can influence the process of money creation through changes in interest rates (lower interest rates stimulate borrowing, while higher interest rates restrict it) and changes in bank reserves (the amount of money private banks need to hold as reserves).

Fact #5: Monetary policy is determined by the FOMC (Federal Open Market Committee)

When it comes to determining monetary policy, there is a lot of confusion. The Board of Governors of the Fed is not directly responsible for the country's monetary policy. Reserve requirements are the minimum amount of money that private banks are required to hold in reserve in order to meet a sudden spike in withdrawals.

On top of that, the Board of Governors of the Fed sets the discount rate, which is the rate that the Fed charges on overnight loans made to banks and other financial institutions to help them meet minimum reserve requirements. That's why the Fed is also known as the lender of last resort. Federal Open Market Committee, or FOMC, is the Fed's monetary policy-making body. Open market operations include buying and selling government bonds by the FOMC.

Members of the FOMC include the Board of Governors, the president of the Federal Reserve Bank of New York, and the presidents of four other Fed branches, who rotate on a regular basis. The FOMC's open market decisions are implemented by the Federal Reserve Bank of New York.

Fact #6: Investors pay attention to Fed meetings

Meetings of the Fed's Board of Governors can significantly affect financial markets, as noted previously. As investors anticipate the effects of interest rate changes, they have an immediate impact on the value of the dollar and major financial markets.

Markets pay particular attention to the FOMC meetings, which are held every other Monday as part of the Fed's regular meetings. During the FOMC's eight regularly scheduled meetings per year, the Committee reviews and analyzes current economic reports and conditions to determine monetary policy.

Monetary policy has three main goals: keeping inflation stable, ensuring maximum employment, and promoting economic growth. The first two goals are also known as the Dual Mandate of the Federal Reserve.