What is the Federal Reserve? We explain it in plain English.
Money & Finances: Banking
The Federal Reserve is the central banking system found in the United States of America. Founded back in 1913 by the US Congress, it was hoped that by creating an organisation to apply and regulate monetary policies, the general public would be more trustworthy of banks. It is separate from any branch of the government, working as an impartial organisation, although Congress would observe and monitor all of its activity. Essentially, the Federal Reserve was not influenced or taking orders from the President or any other aspect of the government – although congress would make regular reviews on their work.
The Federal Reserve works as the bank for the government, as well as monitoring and influencing financial institutes and ensuring that the country’s economy is strong.
How does it Work?It can influence the economy in various ways, such as increasing or lowering interest rates to help either slow it down or speed it up. They attempt to keep a strong balance between low inflation rates and high employment rates to ensure a strong and stable economy, meaning that they manage the money going through the country to ensure the economy remains in good shape.
For example, if the economy is in a downturn, they can introduce monetary policies to try and stimulate growth. As the bank of the banks, they can provide more lines of credit, which in turn can be trickled through the various banks. That means there will be more money available for investment into the economy in the hopes that it will stabilize. There are many different methods in which they can implement policies in the hopes of keeping the economy strong.
Who Controls it?The Board of Governors is the central agency for the Federal Reserve and is based in Washington DC. 12 regional Federal Reserve Banks make up the rest of the organisation, and are located throughout the country with each region responsible for their specific area of the country.
While they do not directly answer to the government, they must act within accordance to the economic and financial polices laid out by them. Congress also provides an oversight for the running of the Federal Reserve.
Why is it Important?Should banks be able to lend money with lower levels of interest, it means that both the individual and business can invest money. With money available for various investments and purchases, money is injected back into the economy in the hopes that it can continue to grow. Without an organisation to provide this, financial markets can be incredibly unstable, leading to more frequent inflation rates and recessions.
With so much influence over the economy, it is clear how important the Federal Reserve is so important. It can pretty much control how fast or slow the economy currently operates, which in turn affects the entirety of the country.
Do They Have Too Much Power?Having so much control over the economy and country itself, should give a clear idea of how much power the Fed has. All of its decisions are done behind closed doors, with little to no transparency towards the general public.
There is a strong argument that they do have far too much power, as they essentially control the money of an entire democratic country without one member of the organisation being elected. They don’t have to answer to the people of the country, yet a constantly under performing economy could lead to strong reviews and change by Congress, the only part of the government that has any influence over the Fed.
It could be a seen cause for concern for many, especially if you have a lot to lose financially from any of their policies. As their job is to promote growth, anytime this is not happening questions need to be asked, but if nobody as the power to question such an organisation, then there is certainly a case for being concerned.
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