The Federal Reserve System is the guardian of the nation’s money. It is playing an increasingly pivotal role in managing the economy. The Federal Reserve System, well-known as the Fed, is conceivably the most powerful financial institution globally. Congress founded the central bank in 1913 to provide the country with a safe, flexible, and stable monetary and financial system.

Like other countries, the United States has a national bank to oversee its monetary policies and provide financial stability. But the Federal Reserve System isn’t one bank. Instead, it includes 12 separate district banks and 25 regional branches across the country. This way no one state, region, or business group can exert too much control.

How does the Federal Reserve work?

The Fed System has three primary components: The Board of Governors, the Federal Reserve Banks, and the Federal Open Market Committee.

The Board of Governors, located in Washington, D.C., provides the leadership for the System. Its seven governors are appointed to 14-year terms by the president and confirmed by the Senate. Their long terms are designed to insulate them from political pressure. However, the chairman serves a four-year term and is often chosen by the president to achieve specific economic goals.

The Federal Reserve Bank is composed of 12 regional banks based in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. These 12 banks provide financial services to the commercial banks in their districts, conduct research on regional and national economies, and represent the interests of their region to the System.

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The Federal Open Market Committee is responsible for formulating a policy to promote stable prices and economic growth. It oversees open market operations. Under the leadership of the Fed chairman, the Federal Open Market Committee (FOMC) meets about every six weeks. Its main task is to evaluate the state of the economy and issue what’s known as a risk statement, indicating if it thinks that either inflation or economic weakness poses a potential threat to the economy. It may also conclude the risks seem balanced. The risk statement tends to impact the stock and bond markets. It is generally interpreted as an indication of the action the FOMC is likely to take at its next meeting or the one following to tighten or loosen the money supply.

The Federal Reserve System

The Fed is an independent government agency funded primarily by interest on government securities it owns. It sets monetary policy under the direction of its chairman, supervises banking operations, and has become a significant factor in shaping the economy.

What are the roles of The Federal Reserve?

The Fed plays many roles and is responsible to keep the economy healthy. It handles the day-to-day banking business of the U.S. government. The Fed receives deposits of corporate taxes for unemployment, withholding, and income and federal excise taxes on liquor, tobacco, gasoline, and regulated services like phone systems. It also authorizes payment of government bills like Social Security and Medicare and interest payments on Treasury bills, notes, and bonds.

Policymaker The Fed seeks to promote maximum employment and stable prices while controlling inflation. It requires balancing potential conflicts among the three to promote economic health. Its primary tool is controlling the amount of money in circulation by buying and selling government securities. Another is adjusting the federal funds rate, which banks charge each other to borrow.
Banker The Fed’s automated clearinghouse (ACH) system is the network through which credits and debits are handled electronically. Examples include recurring direct deposit of paychecks and direct debiting of mortgage payments, and one-time transfers. In addition, the Fed facilitates electronic interbank transfers of payments made by check.
Lender If a bank needs to borrow money, it can turn to a Federal Reserve bank. The interest the Fed charges banks is known as the discount rate. Before the credit crash of 2008, banks needing money preferred to borrow from other banks. But the Fed expanded its lending in the crisis.
Regulator The Fed interprets laws that Congress passes into regulations, monitors the business affairs, and audits the records of all of the banks in its System. Its particular concerns are compliance with banking rules and the quality of loan practices.
Controller The central bank issues and processes Federal Reserve notes for domestic and international use and replaces worn currency. It also distributes coins produced by the U.S. Mint. Various factors impact demand for cash, including the availability of other payment systems.
Guardian The Federal Reserve Bank of New York, is the custodian of gold owned by the U.S. and non-US governments, other central banks, and specific international organizations. It holds approximately 530,000 gold bars in its vaults, weighing about 6,700 tons. The U.S. official book value of gold is $42.2222 per troy ounce, but the market price changes constantly.
Administrator The Fed provides the National Settlement Service (NSS) and Fed wire services to facilitate the secure transfer of trillions of dollars in non-cash transactions.

How does Fed affect you?

The Federal Reserve is responsible for monetary policy and banking system oversight. Fed works to promote a safe, efficient, and accessible system for U.S. dollar transactions.

One of the most visible Federal Reserve functions is to manage inflation. However, the Fed also promotes maximum employment and ensures that interest rates remain moderate over time. As a result, it directly affects your stock and bond mutual funds and your loan rates.

The Fed raises or lowers interest rates. For example, the Fed may choose to lower interest rates when the economy slows. This action encourages businesses to invest and hire more, and it encourages consumers to spend more freely, helping accelerate growth. However, on the other occasion, when the economy may be growing too fast, the Fed may decide to hike rates.

The Fed affects credit card rates. Most credit cards charge a variable interest rate based on the prime rate linked to the federal funds rate. In short, the Federal Reserve affects short-term interest rates, so it affects the rates that people pay on credit cards.

What Is Federal Reserve System And Its Roles? by Inna Rosputnia

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