The Freaky FED and Businesses

How They can Encourage or Discourage

What the FED is and how it Works.

To get started, the FED is the Federal Reserve System. In 1913 the Federal Reserve Act created the FED and it began operating in 1914. The FED is the central bank of the United States. Its purpose is for the nation to have a safer, more flexible, and more stable financial system. Here are some responsibilities the FED has: to conduct the nation's monetary policy by influencing money and credit conditions in the economy, to supervise and regulate banks and other important financial institutions to ensure safety, to maintain the stability of the financial system, and to provide certain financial services to the U.S government. It plays a major part in operating and overseeing the nation's payment systems as well. The FED does for banks what banks do for individuals and business firms. It holds legal reserves, makes loans, it creates its own credit in the form of credit deposits.

How does the FED encourage or discourage business practices?

The FED can use its power to manipulate businesses by actively raising or lowering the money supply. It raises the money supply when it wants more business activity to happen. There is a variety of ways it can do this, but there are two common ways. These would be by lowering interest rates or by buying government securities. What does this mean? Well, by lowering interest rates companies have an easier and cheaper way to borrow money. Therefore, they borrow and spend more, which increases the level of business activity. However, if the FED thinks there is to much activity(by this, it means they think excessive inflation will occur) it will take the opposite step by raising the interest rates and will make it harder for banks to borrow money and for people to borrow it as well.The second common way is to buy government securities from banks. By doing this it gives the banks money they didn't have before Banks lend out this money and this again leads to more business activity. This manipulation is helps keep high employment rates, low inflation rates, and manufacturing output.

To sum up this information, the FED is pretty much the gatekeeper to the U.S economy. It regulates financial institutions and manages the nation's money, and influences the economy. It is literally the bank for all the banks.