The Federal Reserve System is the guardian of the nation’s money — and is playing an increasingly pivotal role in managing the economy.

Like other countries, the United States has a national bank to oversee its monetary policies and provide financial stability. But the Federal Reserve System, known informally as the Fed, isn’t one bank. It’s 12 separate district banks and 25 regional branches spread across the country, so that no one state, region, or business group can exert too much control.

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.

How the Fed works?

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

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.

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Managing money

The Federal Open Market Committee (FOMC), under the leadership of the Fed chairman, meets about every six weeks to evaluate the state of the economy and issues what’s known as a risk statement, indicating if it thinks that either inflation or economic weakness pose a potential threat to the economy. It may also conclude the risks seem balanced.

The risk statement, which tends to have an impact on the stock and bond markets, 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 Federal Reserve’s many roles

The Fed plays many roles as part of its responsibility to keep the economy healthy. It handles the day to-day banking business of the US government. The Fed receives deposits of corporate taxes for unemployment, withholding, and income, and also of 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 as well as interest payments on Treasury bills, notes, and bonds.

Policymaker The Fed seeks to promote maximum employment and stable prices while controlling inflation. This requires balancing potential conflicts among the three to promote economic health. Its primary tools are controlling the amount of money in circulation by buying and selling government securities and 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 as well as one-time transfers. 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 called 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, and 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 US Mint. Various factors impact demand for currency, including availability of other payment systems.
Guardian The Federal Reserve Bank of New York is the custodian of gold owned by the US and non-US governments, other central banks, and certain international organizations. It holds approximately 530,000 gold bars, weighing about 6,700 tons, in its vaults. The US 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.

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

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