Four key things you should know about the Fed

"The Fed", also known as the Federal Reserve System, is the one and only bank of the United States Government. When President Woodrow Wilson signed the Federal Reserve Act into law on December 23, 1913 (1) it was started with the ideas of safety, flexibility and stability in mind. Because the Fed keeps an eye on the world's largest economy, it is one of the most empowered entities in the world. Here are four things you should know about the organization dictating policies that have an impact on our investment portfolios:

  1. Banks, money & interest rates are controlled by the Fed. These three areas make up the lion's share of our economy and the fed monitors all three. The Fed has the power to put money into banks and tell them how to disseminate the funds. The Fed can also control the direction of the money the organization releases by changing the interest rates. For example, the Fed sets the discount rate, which is the interest rate that banks pay on short-term loans from a Fed bank. The Fed also buys and sells government securities, which affects the level of reserves in the banking system. These decisions can all affect interest rates.
  2. Fed policies have a direct impact on investors. The constant fluctuations of interest rates are always directly affecting us, as the Fed controls investor perception by controlling the environment. For example, the Fed can lower or raise interest rates to alter investment choices, which can stimulate or diminish consumer investing and spending. Think about your mortgage loans, credit cards or car loans - all affected by the Fed.
  3. The Fed is independent of the government. The Fed gets its funds from its own special operations and is headed by a government agency in Washington, known as the Board of Governors, or the Federal Reserve. The Board of Governors consists of seven presidential appointees, each of whom serves 14 year terms. All members must be confirmed by the Senate and can be reappointed. The board is led by a chairman and a vice chairman, each appointed by the President and approved by the Senate for four-year terms. The Fed derives its authority from the U.S. Congress, (2) and is considered independent because its decisions do not have to be validated by the President or anyone else.
  4. The Fed's primary focus is regulating banks. The Fed focuses on overseeing banks and other financial institutions. They have oversight of banks from a compliance and regulatory standpoint - from issuing specific regulations and guidelines, to ensuring banks manage their operations, activities and acquisitions. For example, the Fed sets the amount of funds that financial institutions are required to hold in reserve against deposits in bank accounts, and determines how much money banks can make through loaning and investing.

As the central bank for the United States - and the eyes and ears of our economy - the Fed has the ability to motivate and control consumer spending, saving and investing. With one quick look at the Fed, you can easily see how it holds the keys to so many financial decisions, now and in the future.

Sources

  1. "Current FAQs Informing the Public about the Federal Reserve." FRB: What Is the Purpose of the Federal Reserve System? 4 Feb. 2014.
  2. AMI. "Is the Federal Reserve System a Governmental or a Privately Controlled Organization?" AMI American Monetary Institute RSS. HEC13117 12/14.

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