The Federal Reserve

By Kevin Chambers

The Federal Reserve, commonly referred to as The Fed, is the central bank of the United States. The Fed was founded in 1913 after an economic panic in 1907 prompted Congress to create an institution to prevent further catastrophes. It is comprised of 12 regional Federal Reserve Banks, which are responsible for specific geographic regions around the United States. These regional banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The governing body of the Fed is called the Board of Governors. Governors are appointed by the President of the United States and confirmed by the Senate. The Chair of the Federal Reserve and the Vice-Chair are always two of the Governors. Currently, the Chair of the Federal Reserve is Janet Yellen and the Vice-Chair is Stanley Fischer. The policy making body is the Federal Reserve Open Market Committee (FMOC), which is comprised of the Board of Governors, the  president of the Reserve Bank of New York and four of the other regional banks that serve on a rotation.

The Fed has 3 general responsibilities:

• Lender of Last Resort
  • The Fed offer loans to banks or other large institutions that are unable to obtain credit and whose failure would dramatically affect the economy.
• Monetary Policy
  • Monetary policy is action from the Fed that changes the size of the supply of money. Traditionally, the Fed can encourage borrowing and increase the money supply by lowering the Fed Funds rate, the interest rate at which banks lend funds to each other. Quantitative easing is also a form of monetary policy.
• Banker’s Bank
  • The Fed is where banks and the Federal Government keep their funds. The US Treasury directs the flow of all tax revenue and payments through the Fed. The Fed also is responsible for the distribution of new currency.

The Federal Reserve is arguably the most powerful financial institution in the world. The stock market reacts almost every time the Board of Governors meets.  The Fed has the power to set interest rates and create other monetary policy to control inflation. As the U.S. economy strengthens, there is a debate about when is the best time to allow interest rates to rise and how that will affect inflation. Since decisions the Fed makes can have widespread ramifications for the global economy, all actions by the Fed are scrutinized by economists and investors.