The Federal Reserve's Role in Our Economy

Any time the Federal Reserve makes a decision to adjust interest rates, it is included in the major news stories of the day. Have you ever wondered how that adjustment trickles down to ultimately affect you? And what exactly is the Federal Reserve, commonly known as "the Fed"? How does the Federal Reserve decide what sort of adjustment to make? Read on for the answers to these questions and more.

The Federal Reserve Bank, located in Washington, D.C., was established in 1913, and its overall purpose is to oversee the economy. The Fed is run by a chairperson and a board of governors. The chairperson is appointed by the President for a four-year term. The chairman leads the six people on the board of governors, who are appointed by the President and confirmed by the Senate for 14-year terms. Each of these governors represents a different region of the United States.

One of the main responsibilities of the Federal Reserve is that it acts as the bank for all financial institutions in the United States. It's the bankers' bank. Think of it as the main branch of every bank in the country. The Fed provides banking services to financial institutions like the services your bank provides for you--deposits, check clearing, etc., including charging service fees and collecting interests on loans made. It performs this function through twelve reserve banks that provide banking services to the banks in their Federal Reserve district. In addition, the Fed is responsible for distributing new money as well as inspecting and discarding money in bad condition.

The Federal Reserve is also in charge of supervising financial institutions and making sure they are complying with all the banking rules. Banks are required by law to regularly undergo inspections by the Federal Reserve Bank to make sure they are in compliance. Many large banks have resident Fed examiners. This helps to ensure that the banks are secure, insofar as the current regulatory laws can do.

Arguably the most important purpose of the Federal Reserve is to create and sustain a healthy economy. The traditional definition of a healthy economy is a time of economic growth, stable costs, and low unemployment. Basically, the Federal Reserve is designed to create and sustain a healthy economy by controlling the money supply through buying and selling U. S. Treasury securities, adjusting the discount rate, changing reserve requirements as well as a host of other responsibilities.