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What is the Federal Reserve?


In these uncertain economic times we hear a lot about the Federal Reserve (the Fed). Most people know that it was the Fed that gave out the stimulus checks during the pandemic and that they are responsible for the increase in interest rates. But what else do they do? Well the Federal Reserve Act was signed into law back in 1913 and it is a core element of maintaining a stable economy.



The role of the Federal Reserve

The Federal Reserve System is the Central Bank of the United States. It is tasked with effective operation of the US Economy in order to benefit public interest.


Three key entities support the Federal Reserve System: Federal Reserve Board of Governors, Federal Reserve Banks and the Federal Open Market Committee (FOMC), as pictured below.



Specifically there are 5 general functions within its broad remit:


  • Monetary Policy - to make sure that employment is maximized, prices are stable and that interest rates are moderate over the long term
  • Stability of the Financial System - to minimize and contain systemic risks within the system through active monitoring
  • Individual Financial Institutions - to promote the safety and soundness of these and monitor their impact on the whole financial system
  • Payments and Settlements - to ensure that US dollar transactions and payments are efficient throughout the financial system
  • Consumer protection and community development - through research and analysis of consumer trends and issues, the administration of consumer laws and regulations and community economic development activities



Federal Reserve Board of Governors

The Board of Governors is an independent agency of the federal government. It is the governing body of the Fed and is run by seven members, also known as 'governors' who are nominated by the US President and confirmed to their positions by the US Senate. This board guides the whole operation of the Fed in fulfilling its responsibilities. Each member of the Board of Governors also serves on the FOMC. To ensure stability and continuity of operation each member is appointed for a 14 year term.


The Chair (the current incumbent being Jerome Powell) and the Vice Chair serve only 4 year terms (these are appointed in the same way).


The board overseas



Federal Reserve Banks

There are 12 Reserve Banks whose operations are overseen by the board and who share the responsibility regulating and supervising certain financial institutions and activities. These banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St Louis, Minneapolis, Kansas City, Dallas and San Francisco. They each have designated geographic areas of operation so that they cover all 52 states and are responsible for the carrying out the core Fed activities in those areas  Each of these banks is incorporated separately and has a nine member board of directors.



FOMC

This is the body within the Federal Reserve that sets monetary policy. So they set the base interest rate which dictates how much the US Treasury will charge to lend to banks. It's their job to monitor and mitigate economic headwinds in order to keep the economy stable.


There are 12 voting members on the FOMC which consists of the 7 Board of Governors, the president of the Federal Reserve Bank of New York and 4 of the remaining 11 reserve bank presidents (each of whom serves a one year term on a rotating basis). That means at any one point there are Reserve Bank Presidents who are not on the FOMC.



The tentacles of the Fed reach far and wide, its primary responsibilities are to keep the economy stable by managing the supply of money in circulation and oversee all financial activities and institutions.



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Useful Links: Risk and Reward, The end of Cheap Money, Common Trading Mistakes, What is a Recession, The Problem with Economic Forecasts, What is Monetary Policy, What is Fiscal Policy, Picking Stocks in 2023, Your Best Shot at Goal, Speculating vs Investing, Profile of a Futures Trader, Invest in Yourself


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