With the economy in the news every day, more attention is being focused on the Federal Reserve than ever before. Let's look at some of the facts, and understand exactly what they do and how they do it.
The Federal Reserve System was created on December 23, 1913 by President Woodrow Wilson to act as the central bank of the United States. It was created to provide the nation with a safer, more flexible, and more stable monetary, banking and financial system.
The Federal Reserve System is made up of twelve Federal Reserve Banks, overseen by the Board of Governors. The Board of Governors is located in Washington DC and is comprised of just seven members, who are appointed by the President and confirmed by the Senate. The full term of each member of the Board of Governors is 14 years, and the appointments are staggered such that one term expires on each even-numbered year. This system ensures that "fresh blood" will be brought to the Board every two years. When your term is up as a Board Governor, you are done, and cannot be reappointed. But if a member leaves the Board before his or her term expires, the person appointed to fill the remainder of the term can be reappointed for another full term. The terms for the Chairman and Vice Chairman are four years, but may be reappointed for additional four-year terms. The current Chairman, Ben Bernanke, and Vice Chairman Donald Kohn lead the Board of Governors.
So What Does the Fed Do on a Daily Basis?
The main responsibilities of the Fed include:
- Researching US national and regional economies
- Providing financial services to depository institutions, the US government, and foreign official institutions
- Supervising and regulating banking institutions to ensure the safety of the nation's financial system and protect the credit rights of consumers
- Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy (i.e. hiking or cutting the Fed Funds Rate, as they did recently) in pursuit of maximum employment, stable prices, and moderate long-term interest rates
- Communicating information about the economy via publications, speeches, seminars and websites
But the communication method that typically grabs the attention of most individuals is the statement given by Federal Chairman Ben Bernanke, following the eight formal meetings that take place about every six weeks throughout the year. At these meetings, the Fed has the opportunity to make changes to the Federal Funds Rate, and make their decision by reviewing economic and financial conditions. They can also make adjustments to the Fed Funds Rate outside of these meetings, but rarely do so because they don't want to deliver a surprise that could rattle the financial markets.
Overall, the Fed's main responsibility is to keep the economy growing at a steady pace by keeping inflation stable and rates moderate. When inflation is low and stable, businesses and households can spend, knowing that their purchasing power can remain strong.
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