The Fed and its Wonderful Powers

By: Sarah Reeves

What is the Fed?

The Federal Reserve System is the central banking system of the United States. It was created by the Federal Reserve Act in 1913 and began operating in 1914. When banks need money, they borrow from the Fed. Banks buy stocks in the Fed and earn dividends. The Fed is controlled by a Board of Governors. Advisory councils keep people informed on the condition of the economy, how institutions are doing and issues relating to consumer loans. The Federal Open Market Committee (FOMC) makes decisions that affect the economy by changing the money supply.

The Board of Governors

The Board of Governors, also known as the Federal Reserve Board, is the national component of the Federal Reserve System. The board consists of the seven governors, appointed by the president and confirmed by the Senate. Governors serve 14-year, staggered terms to ensure stability and continuity over time. The chairman and vice-chairman are appointed to four-year terms and may be reappointed subject to term limitations.Among the responsibilities of the Board of Governors are to guide monetary policy action, to analyze domestic and international economic and financial conditions, and to lead committees that study current issues, such as consumer banking laws and electronic commerce.

The Federal Open Market Committee

The Federal Open Market Committee, or FOMC, is the Fed's monetary policymaking body. It is responsible for formulation of a policy designed to promote stable prices and economic growth. Simply put, the FOMC manages the nation's money supply.The voting members of the FOMC are the Board of Governors, the president of the Federal Reserve Bank of New York and presidents of four other Reserve Banks, who serve on a rotating basis. All Reserve Bank presidents participate in FOMC policy discussions. The chairman of the Board of Governors chairs the FOMC. The FOMC typically meets eight times a year in Washington, D.C. At each meeting, the committee discusses the outlook for the U.S. economy and monetary policy options.

The Fed and Monetary Policy

First off, what is a monetary policy? Monetary Policy is one of the ways that the U.S. government attempts to control the economy. If the money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is slowed too much, then economic growth may also slow. If Fed wants to lower interest rates, they must move the supply line to the right. To raise interest rates, you must make less money.

Function of the Fed

The Fed does a number of things;

  1. Oversees commercial banks
  2. Enforces laws that deal with consumer borrowing.
  3. Acts as governments bank by holding the money, selling bonds and treasury bills and issues and controls the circulation of currency

Federal Reserve Banks

A network of 12 Federal Reserve Banks and 25 branches make up the Federal Reserve System under the general oversight of the Board of Governors. Reserve Banks are the operating arms of the central bank. Each of the 12 Reserve Banks serves its region of the country, and all but one have other offices within their Districts to help provide services to depository institutions and the public. The Banks are named after the locations of their headquarters - Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.

Manipulating the Money Supply

The Fed has a lot of power when it comes to the money supply. It can Raise or lower discount rates which is the rate they charge banks for loans. It will lower if they want to stimulate the economy. They can also raise or lower the reserve which is the percentage of money a bank must keep in the Federal Reserve Bank.

How the Fed uses it's powers to encourage and discourage business practices

The Fed can do three things:

1. reduce the fund rate through market operation.

2. reduce the discount rate for the banks.

3. reduce the required reserve ratio for the banks.

All of them will create more liquidity so that the banks can lend more money to business. On the contrary, if the Fed wants to discourage businesses, it just do the reverse.

Summary

The Fed seems like the main component when it comes to money. In this day in time, money is a necessity that you can't live without. The Fed has a giant effect on big corporations, the economy, the government, even the whole world.