What is the Federal Reserve?
What Is the Federal Reserve System?
The Federal Reserve System (FRS) is the central bank of the United States. Often called the Fed, it is arguably the most influential financial institution in the world. It was founded to provide the country with a safe, flexible, and stable monetary and financial system. The Fed has a board of 7 members and 12 Federal Reserve banks, each operating as a separate district with their own presidents.
There is a common misconception that the Federal Reserve System is privately owned. In fact, it combines public and private characteristics: The central governing board of the FRS is an agency of the federal government and reports to Congress. The Federal Reserve Banks that it oversees are set up like private corporations.
Understanding the Federal Reserve System (FRS)
A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation, union, or group of countries. In modern economies, the central bank is usually responsible for formulating monetary policy and regulating member banks. The Fed is composed of 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the U.S.
The Fed was established by the Federal Reserve Act, which was signed by President Woodrow Wilson on Dec. 23, 1913, in response to the financial panic of 1907. Before that, the U.S. was the only major financial power without a central bank. Its creation was precipitated by repeated financial panics that afflicted the U.S. economy over the previous century, leading to severe economic disruptions due to bank failures and business bankruptcies. A crisis in 1907 led to calls for an institution that would prevent panics and disruptions.
The Fed has broad power to act to ensure financial stability, and it is the primary regulator of banks that are members of the Federal Reserve System. It also serves as the lender of last resort to member institutions. Often referred to simply as the Fed, it has what is often called its "dual mandate" of ensuring price stability and maximum employment.
The monetary policy goals of the Federal Reserve are twofold: to foster economic conditions that achieve stable prices and maximum sustainable employment.
The Federal Reserve System's Organizational Structure
There are seven members of the Board of Governors. These individuals are nominated by the President and approved by the U.S. Senate. Each governor serves a maximum of 14 years. Their appointment is staggered by two years, which is intended to limit the political influences it might be subjected to when control of appointments shifts to different political parties during elections. The law also dictates that appointments represent all broad sectors of the U.S. economy.
The Federal Reserve System's Independence
Central bank independence refers to the question of whether the overseers of monetary policy should be completely disconnected from the realm of government. Those who favor independence recognize the influence of politics in promoting monetary policy that can favor re-election in the near term but cause lasting economic damage down the road. Critics say that the central bank and government must tightly coordinate their policies and that central banks must have regulatory oversight.
The Fed is also considered independent because its decisions do not have to be ratified by the president or any other government official. However, it is still subject to congressional oversight and must work within the framework of the government's monetary and fiscal policy objectives.
Who Owns the Federal Reserve?
The Federal Reserve System is not owned by anyone. It was created in 1913 by the Federal Reserve Act to serve as the nation's central bank. The Board of Governors is an agency of the federal government and reports to and is directly accountable to Congress.
What Does It Mean That the Federal Reserve Is a Central Bank?
A central bank is a financial institution responsible for overseeing a nation's monetary system and policies. A central bank monitors economic changes, controls the money supply, and sets interest rates to influence price stability and employment.
Does the Fed Print U.S. Money?
Money is printed by the Bureau of Engraving and Printing. The Federal Reserve controls the amount of money circulating by implementing monetary policy. You may also hear that the Fed "prints" or creates money through its operations. However, this is untrue. Depository institutions and lenders are the ones who "print" money through fractional reserve banking.
How Does the Fed Set Interest Rates?
The Federal Reserve sets the rate for its Overnight Reverse Repurchase Agreement Facility, where it buys and sells securities. This rate helps set the bottom number for the rate range. It also pays Interest on Reserve Balances (IORB), the rate of which helps set the top number for the range. The Fed also uses the rate at its discount window and open market operations to help establish interest rates that it believes will influence the economy to produce an average inflation rate of 2% over the long run.
In Conclusion
The Federal Reserve System is the central banking system of the United States. The Fed uses the system and the tools it has to set interest rates and regulate the money supply to accomplish its mandate of price stability and maximum employment.
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