What is the Federal Reserve and How Does it Work?

Author: BankFeeInsider.com     Tuesday, August 19, 2014 12:00 AM

The Federal Reserve is often considered quite a mysterious institution. Actually it is not really that mysterious, however, the Federal Reserve is the single most important financial institution in America. The Federal Reserve is located in Washington D.C. and is actually part of the U.S. government as it is the bank of the U.S. government. Often referred to as the gateway to the U.S. economy, the importance of the Federal Reserve cannot be underestimated. There are twelve branches that make up the Federal Reserve and it is overseen by the Fed’s Board of Governors.

Not only does the Federal Reserve function as the bank of the U.S. government but the Federal Reserve also studies economic trends as well as making important suggestions as to ways the economy could be improved. Although the Federal Reserve is an independent agency they are subject to some government interaction. Federal Reserve board members are nominated by the President and are voted upon by the Senate.

According to the Federal Reserve’s website their main purpose is to, “ promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates.” This basically means that the Federal Reserve is supposed to make sure that the U.S. has a proper system of banking as well as a healthy, growing economy.

Furthermore the Federal Reserve monitors U.S. banking institutions to ensure that banks are not taking advantage of customers. In addition to all of these responsibilities the Federal Reserve also monitors and in many cases supervises many of the money transfers that take place in the U.S. each day as well as distributing paper and coin money to most of the financial institutions in this country.

One important job of the Federal Reserve is to conduct research on the health of the economy and to make this information available to the general public through means of published articles and websites. When individuals are educated about the economy as a whole as well educated on their own personal finances the entire economy is impacted in a positive way. One source of this important information is The Beige Book, which consists of important information for banking specialists. The other important source of economic information is the Fed Minutes. The Fed Minutes are actual discussion notes from the Federal Open Market Committee. These are both released eight times a year and are vital sources of economic insight for business owners and financial leaders.

The Federal Reserve was created in 1913 in an effort to avoid bank panic like that seen in 1907 after the United Copper Company fiasco which caused runs on several U.S. banks and resulting bankruptcy for these financial institutions.

The Federal Reserve affects the lives of every American practically every day as they have the power to greatly influence banking policy and practice by almost all major financial institutions as well as the ability to raise or lower interest rates. This affects how almost every American handles their money and makes major purchases.

Source: BFI