The Federal Reserve (Fed) is the bank of the U.S. Government and is located in Washington D.C. Created by the U.S. Congress on December 23, 1913, the Fed now consists of 12 Federal Reserve banks, multiple branches, and is responsible for regulating America’s financial institutes, making economic policy, and controlling long term interest rates. The Fed also works to keep prices stable, protect consumer credit rights, and handles most electronic payments and check clearing. In addition, the Fed manufactures money and distributes coin and paper money to banks.
The Fed is an independent agency overseen by the Fed’s Board of Governors. The board consists of seven members selected via Presidential nomination and approved by the Senate. Members serve on the board for a term of 14 years, and terms are staggered where each term expires on each even numbered year. The Fed does not need approval from any branch of government before making decisions, but does routinely testify to both the Senate and the House. This allows the Fed to be politically neutral and be isolated from political pressure.
Within the Fed is a group called the Federal Open Market Committee (FOMC). The FOMC is made up of the seven members of the Fed’s Board of Governors, the President of the Reserve Bank of New York, and four additional Reserve Bank Presidents. The main responsibility of the FOMC is to meet eight times a year to determine if key interest rates should rise or fall, the money supply should increase or decrease, and relate economic conditions to the public.
One of the key effects the Fed has on the average American citizen is increasing or decreasing key interest rates. By raising interest rates, the Fed can slow down the economy. This means that the interest rate on personal loans rise, resulting in home and car purchases becoming more expensive. Raising the interest rate also may raise interest rates on credit cards, costing American’s more of their disposable income. Companies are also affected by increases in the interest rate. As the cost of borrowing money rises due to increased rates, companies may need to reduce their workforce. When the Fed decreases interest rates, borrowing money becomes less expensive as the interest on the loan is reduced. Companies may take the opportunity to borrow money at this lower rate which could result in increased hiring as consumers spend more.
Raising interest rates is necessary when the economy is strong, and price stabilization along with control of inflation is needed. Without raising interest rates during a strong economy, the cost of items would climb resulting in the value of the U.S. dollar decreasing. Decreasing interest rates is required when the economy is stagnant or struggling. Lower interest rates are incentives for companies and consumers to spend and hopefully help increase economic strength. It is up to the Federal Reserve to find the balance between growth and inflation and carefully regulate interest rates so that the economy can grow at a controlled pace and a stable financial environment exists for the American people.