What is the FED (United States Federal Reserve)?
The Federal Reserve most popularly known as the FED is entrusted with the task of overlooking the United States economy. It is the national bank of USA and is recognized as one of the most dominant institutions across the globe. The FED is entrusted with the task of setting the monetary and fiscal policy of the world's super power, America, which impacts not only the local citizen but the global population. The FED was created in 1913 by the United States congress. Before the formation of FED, the USA had no formal institution that was entrusted the task of setting and regulating the monetary policy. The resultant impact was that the markets were volatile and the banking system was not regarded as robust by the public at large. FED was created with the aim of formation of an institution that was solely responsible for regulating the banking system of USA. The FED is an independent organization and does not require the president to ratify its decisions. Nonetheless, the congress is entrusted with the task of overseeing the workings of the organization on a periodic basis.
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What is the FED (United States Federal Reserve)?[/caption]Boards of Governors of the FED are based in Washington and are responsible for heading the organization. The BOD is headed by seven presidential members all of whom must serve a fourteen year period. The presidential members must be approved by the senate and can be required to serve another terms based on circumstances. The board is headed by a chairman (currently Ben Bernanke) who is initially appointed by the president of USA while the senate must approve the member. The chairman is required to serve a four year period and is assisted by a vice chairman.
The BOD is responsible for overseeing the work of twelve regional branches of the FED which are situated in the chief cities of USA. The Reserve Bank is entrusted with the basic workings of the FED and operates as the major system within the workings of the central bank. The banks are responsible for generating their own revenue from various sources. These include the services that they provide to other banks, the interest income from government securities, income from any foreign reserves and interest income on debt of depository organizations. The income generated from various sources is used to finance the daily working capital cycle whereas excess income is transmitted back to the U.S treasury. Lastly, all national banks operating within USA are referred as member banks and are a division of the FED. A couple of state-chartered banks are also referred as member banks.
Federal Open Market Committee (FOMC) is a part of the FED and is responsible for deriving the policy implemented by the FED. The chair of FOMC and the BOD are the same whereas the voting members consist of presidential candidates from BOD, four Reserve Bank presidents and Federal Reserve Bank president. These members are required to serve on a rotation basis pertaining to a one year time period. Reserve Bank presidents are required to participate in the policy making process irrespective of the fact that they are granted the voting rights or not. The FOMC has the final say in a number of significant matters including the monetary policy and specifically the interest rate.
The underlying theme of FED is to ensure economic growth, employment, low levels of inflation, stability of purchasing power parity and reasonable interest rates over a long term period. Simply put, the FED is responsible for ensuring stability and sustainable economic growth. The duties of FED are therefore widespread and are concerned with ensuring the smooth running of the economy.
The FED provides a number of services to banks in a similar manner as a bank might provide a service to a citizen. This is done so that the national payment process is efficient and secure. For example, transfer of money from one bank to another might be aided by the FED. The most important duty of the FED concerns serving the government of USA. The government of USA is the higher spending customer of FED. The FED is responsible for maintaining the checking account of the US treasury whereby the inflows and outflows of cash are regulated by the FED. Any inflows that arise due to tax revenues and outflows pertaining to government spending are passed through this account and the FED is responsible for handling them. The FED is also responsible for dealing with government securities whereby selling and buying transactions pertaining to bonds and treasury bills is conducted by the FED.
The FED is also responsible for issuance of currency in form of paper and coins. Although the US treasury is responsible for the production of cash, the FED is the institution that is responsible for allocating it to financial organizations. The FED duties also extend to checking the bills for damage and ensuring that bills that show signs of wear and tear are taken out of the cash cycle.
Another duty of the FED is to regulate and supervise the other banks operating within the USA economy. The other banks include the member banks, international banks, foreign transactions of these banks and banks that are USA based but operating abroad. The FED ensures that the banking policies are in line with customer's best interest and many laws and regulations have been enacted that ensure that the banking activities are bona fide to the public. The responsibilities of the Federal Reserve Bank extend to the investors as well whereby they are responsible for setting the limits on the debt that an investor can take. Last but not the least the FED is responsible for setting the monetary policy of the economy. This is one of the most important duties of the FED whereby the FED ensures that the interest rates and money supply result in positive economic growth and development. The three basic tools used by the FED include the open market operations, discount rate and reserve requirements; all of which are adjusted to reflect the current monetary policy devised.
If you would like to learn more about the Federal Reserve (FED), be sure to click on this link because it provides a great video lesson on how the FED works and how investors can use it to their advantage.
Also, if you would like to read a great resource on investing, be sure to check out this Warren Buffett book. It discusses subjects like interest rates and how the FED controls them.
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