What is the Federal Reserve?

Published by Thomas Herold in Banking, Economics, Laws & Regulations

'Federal Reserve' is explained in detail and with examples in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The Federal Reserve, also known as the Fed, or the Federal Reserve Board, proves to be the United States’ central banking system. This central bank came about in 1913 as a result of Congress passing the Federal Reserve Act. Congress created the organization because of a number of serious financial panics that culminated in the severe panic of 1907.

With time, the Federal Reserve’s roles and areas of responsibility have grown as the organization has expanded. Economic events such as the Great Depression have only served to encourage this.

The Federal Reserve today counts among its duties many responsibilities. Among these are regulating and overseeing the country’s banks, managing the country’s monetary policy and supply, assuring the financial systems’ continuance and stability, and offering a variety of financial services to depositing banks, foreign central banks, and the United States government.

The Federal Reserve’s structure is made up of a number of different components. Among these are the Federal Reserve Board of Governors, all of whom are appointed by the President. The Federal Open Market Committee, also known by its acronym of FOMC, sets the monetary policy, like the interest rates, for the nation. There are also Federal Reserve Banks, which are twelve regional institutions that are found in the biggest area cities around America. They offer physical currency to member banks when demand proves to be unusually high. Several councils that advise it are a part of The Federal Reserve, as are technically the member banks throughout the country.

The FOMC component of the Federal Reserve is actually comprised of all of these seven Board of Governors members along with the presidents of the twelve regional banks. Only five of these presidents are voting members at a time. Together, they review the state of the U.S. national economy in order to determine what fiscal policies need to be pursued. When the economic growth is slowing, or a recession is occurring, they cut the national interest rates. When inflation is appearing or the economy is overheating, they raise these interest rates.

The Federal Reserve proves to be a unique entity among the major central banks. This is because it divides up the various responsibilities into some public and some private parts of the institution. The Federal Reserve furthermore serves to create the currency used for the country, the U.S. dollar. The fact that it is both a public and private institution, with so many varied and vast powers, makes it one of a kind.

Because the U.S. dollar is still the reserve currency of the world, the Federal Reserve’s powers are far greater than simply managing the U.S. economy. In actual practice, they also are the custodians and managers of the world’s reserve currency. This gives them considerable power and influence throughout the entire world economy, since they are able to create not only dollars for the U.S. economy, but also for other central banks use in foreign countries. As a result of this, more than half of the physically printed U.S. dollars are found outside of the United States.

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The term 'Federal Reserve' is included in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.