The Federal Reserve System, commonly known as the Fed, is the central banking system of the United States of America and since its establishment in 1913 has been the most powerful influencer of the US economy.
The US Federal Reserve, or simply the Fed, is an independent government agency that was created by Congress to serve as the central banking system of the United States. As a government-sponsored institution, it serves five primary functions intended to support economic stability and growth. These include conducting monetary policy, overseeing and regulating banking institutions, providing financial services to depository institutions, maintaining the stability of the financial system, and providing certain economic services to the states and local governments.
The Federal Reserve System is made up of the Board of Governors, twelve regional Reserve banks, and Federal Open Market Committee. The Board of Governors, or the Federal Reserve Board, is made up of seven members appointed by the President of the United States and confirmed by the Senate. These seven members serve staggered fourteen-year terms and oversee the Federal Reserve System and its operations.
The Board of Governors directs the activities of the Federal Reserve Banks and they execute the governments centralized banking policy. As part of the Federal Reserve System, the twelve regional Reserve banks and the Board of Governors are responsible for the execution of monetary policy. This is implemented through setting and adjusting the target Federal Funds rate and setting and adjusting the discount rate for financial institutions.
The Federal Open Market Committee, or FOMC, is made up of twelve members and serves as the policy-making arm of the Federal Reserve System. This includes seven members from the Federal Reserve Board and five from the regioncentral Reserve Banks. The FOMC sets targets for the Federal Funds rate, approves changes in the discount rate, provides the primary means of implementation of the nations monetary policy, and provides the direction to the Federal Reserve Banks.
The Federal Reserve is arguably the most important influencer of the US economy and its actions have a direct impact on the US economy. By forming and guiding US monetary policy, the Fed can influence the money supply, credit availability, inflation, and interest rates in the US economy. The Federal Reserve sets the Federal Funds rate, which is the target interest rate that banks borrow and lend money to each other in the overnight market. When the Fed lowers the Federal Funds rate, it lowers the cost of credit making it easier for businesses, consumers, and the government to borrow money.
The Fed also works to maintain the stability of the US financial system and serves as the lender of last resort, providing liquidity to banks when needed. During times of financial and economic instability, the Federal Reserve can also inject excess reserves into the banking system and increase the money supply, which can provide a stabilization effect.
The Federal Reserve System, although powerful, is not perfect. Many economists have criticized the Fed for failing to respond to the financial crisis of 2008-2009, which saw the US economy enter one of the most severe recessions since the Great Depression. This created a great deal of hardships for countless individuals, businesses, and governments.
Despite the criticism, the Federal Reserve System remains an integral part of the US economy and is likely to continue to play an important role in the nations economic future. It is an institution with an immense amount of power, and understanding how it functions is beneficial in understanding the US economy.
