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What is the Fed?
The Federal Reserve, often referred to as the Fed, is an independent entity that was established by Congress in 1913. The goal of the Fed is to promote sustainable economic growth, high employment rates, moderate long-term interest rates, and to preserve the purchasing power of the U.S. dollar. Prior to the Fed’s inception, the U.S. did not have a formal organization for examining and implementing monetary policy.
Although the Fed is an independent organization, it is subject to oversight by Congress. The Fed is managed by the Board of Governors, made up of seven presidential appointees. The Fed’s responsibilities are to:
- Manage U.S. monetary policy by influencing money and credit conditions in the economy.
- Regulate banks and financial institutions to maintain the health and credibility of the U.S. banking and financial system.
- Protect consumers’ credit rights.
- Ensure the stability of the economic system and mitigate systemic risk in the financial markets.
- Provide financial services to U.S. financial institutions, foreign financial institutions, and the U.S. government. This includes managing the U.S. payments systems.
There are 12 Federal Reserve banks in the United States. These central banks are considered the most powerful financial institutions in the world. Each bank is responsible for a specific geographic area of the United States. The banks generate income from:
- Earned interest on government securities.
- Services provided to banking institutions.
- Foreign currency income.
- Earned interest on loans to depository institutions.
This income is used to finance the Fed’s operations. Any surplus is deposited back into the U.S. Treasury.
The United States is the Federal Reserve’s biggest banking customer. The bank handles all revenue generated by tax dollars and all government payments are managed through the Federal Reserve’s bank. Additionally, the Fed sells and redeems government securities, which include bonds, notes and Treasury bills. The Federal Reserve banks issue all paper and coin currency and take currency out of circulation when damaged from wear and tear.
The Federal Open Market Committee, also run by the Federal Reserve, meets at least eight times per year to decide whether monetary policy should be modified by lowering or raising the federal funds rate, the rate at which banks lend money to one another overnight to meet loan reserve requirements.
Example of the Fed
In addition to its supervisory responsibilities, the board drafts and proposes federal laws regarding consumer credit. A few examples include the Truth in Savings Act, the Home Mortgage Disclosure Act, and the Truth in Lending Act.
One of the most important jobs of the Fed is to manage U.S. monetary policy by modifying interest rates, buying and selling government bonds, and adjusting the amount of reserves banks are required to maintain.
The Fed’s rate moves affect the cost of consumer borrowing, including mortgages, home equity loans and other types of loans.