It’s important to know how it works
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There’s a lot of buzz about the Federal Reserve and what “it” is going to do next. What effect will their actions have on the economy? Do you know what the Federal Reserve is and what it does? Read on, and you will be one of the few who does.

The Federal Reserve System’s structure

When people talk about “The Federal Reserve” or even “The Feds,” it is a shorthand way of describing the central banking system of the United States. The Federal Reserve System was created by Congress in 1913 when it enacted the Federal Reserve Act. The Federal Reserve Act’s purpose was to establish a more centralized control of the monetary system in order to alleviate financial crises.

The Federal Reserve has a Board of Governors who are appointed by the president and confirmed by the Senate. The Chairman of the Board, the most visible member, is currently Jerome Powell, who recently told an audience in Dallas, Texas that he was trying to demystify the Federal Reserve and help people understand what it was they did. He joked that for most of his own life, he didn’t understand the role of the Federal Reserve. The members of the Board serve for 14-year staggered terms so as to ensure there is stability in the country’s monetary policy.

There are 12 Federal Reserve Banks (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco), representing 12 regions of the country, which make up the Federal Reserve System and function under the general oversight of the Board of Governors. Reserve Banks are the operating arms of the central bank.

The Federal Reserve’s function

According to Powell, “The Federal Reserve’s job is to strive for maximum employment, stable prices and a stable financial system.” According to its website, the Federal Reserve’s general functions have the dual purpose of promoting the effective operation of the U.S. economy and the public interest. In order to fulfill their congressional mandate, they “conduct the nation’s monetary policy,” the goal of which is to see that there is maximum employment, stable prices and to control long-term interest rates. They make sure that the financial system is stable through active monitoring of the U.S. economy. And, they keep watch on individual financial institutions to make sure that they remain sound. These functions can be summed up as monetary policy, banking supervision and financial services.

Effects of The Fed’s policies

The Federal Reserve is said to “manage inflation” to make sure that the economy doesn’t overheat or stagnate. It does this by setting the base interest rates for borrowing. When the economy needs to be stimulated and there is little risk of inflation, the Fed lowers interest rates, which spurs business growth and increases employment. If The Fed feels that the economy is growing too much, and inflation will be triggered, the Federal Reserve raises interest rates, which makes borrowing for banks and for consumers more expensive. In his speech, Powell said the Fed’s job now is to find that middle ground between keeping the rate low for too long, which could fuel inflation, or raising the rate too soon and “prematurely [terminating] an expansion.”

The Fed has raised interest rates three times this year and is expected to raise them again at the end of the year. Whereas spurring the economy and especially job growth was the goal during and immediately after the most recent recession, preventing inflation is now The Fed’s goal. The Fed’s decisions have a direct and important effect on everything from your chances of being employed or laid off, your ability to buy a home, a car or get a loan for any other large investment, as well as the value of any stocks and bonds that you own.

Takeaway

If you’ve been following along and taking notes, you have a basic understanding of the structure, function and effect of the Federal Reserve. You can see how well you’ve done and test your knowledge about the Federal Reserve through these quizzes.

 

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Posted 12.05.2018 - 09:00 am EST