What is the federal reserve?
The Federal Reserve, known popularly as “the Fed,” is the central bank of the United States. It studies economic trends and makes decisions to help the economy work better.
It was created by Congress in 1913.
The main job of the Fed is to keep the U.S. economy and currency stable.
- Oversee the country’s money supply
- Regulate banks and protect the credit rights of consumers
- Maintain the stability of the financial system
- Provide financial services to the U.S. government
The aim of the Federal Reserve is to ensure that the economy is not too hot and not too cold. Its primary method of doing this is through its power over monetary policy (supply of money in the economy).
- Maintain stable prices (control inflation)
- Ensure maximum employment and manufacturing output
How it does this
The Fed can either stimulate or slow down the economy by:
- Raising and lowering interest rates
- Creating money and using a few other tricks
This manipulation helps maintain low inflation, high employment rates, and healthy manufacturing output.
What makes up the Fed
- A central governmental agency in Washington, D.C. (the Board of Governors)
- Twelve regional Federal Reserve Banks in major cities throughout the United States.
Those cities are:
- San Francisco
- Kansas City
- St Louis
- New York
The seven members of the Board of Governors are appointed by the U.S. president and confirmed by the Senate.
Calculator: How long to double your money?
As an independent agency, the Fed can make decisions without the approval of other branches of government. However, it is subject to questions from Congress over its actions, and its chairman regularly testifies to both the Senate and the House.
How the Fed creates money
The two forms of money created by the U.S. government are:
- Currency – printing bills or mint coins
- Federal Reserves – buying securities (treasury bills, notes, bonds) on the open market in exchange for cash to the public (Bank Deposits)
In order to develop the nation’s monetary policy, the Fed looks at many economic signs on a near-constant basis.
The Federal Reserve chairman accesses data about the economy every half hour when things are calm, and every 15 minutes when things aren’t.
Here are a few of the signs examined by the Fed:
- Consumer Price Index (CPI) – The change in price for a set of goods and services intended to represent what a typical consumer might purchase over a given period.
- Gross Domestic Product (GDP) – The total of all of goods produced in the United States. It is used as an indicator of the performance and growth of the economy.
- Housing Starts – An estimate of the number of housing units that started construction in a given period.
- Nonfarm Payroll Employment – The total number of payroll jobs that are not in the farming business.
- S&P Stock Index – The Standard & Poor Index shows the changes in price in a wide variety of stock. It indicates the confidence consumers and businesses have in the economy.
- Before the Fed’s creation in 1913, there were over 30,000 different currencies floating around in the United States.
- The Fed decides how much money should be printed annually. In 2010, $974 million was printed. In contrast, $30 billion of Monopoly board-game money is printed each year.
- Former Fed Chairman Alan Greenspan has a tic in his right eyebrow. Investors measured how high he raised it while talking, saying it was a better indicator of whether interest rates were going up.
In the final analysis, the Federal Reserve is a compromise between a nationalized banking system and a completely private one. It is unique among the world’s central banks because of its hybrid nature.