The Federal Reserve, whose full name is "Federal Reserve System of the United States", is actually the central bank of the United States. It is called Federal Reserve in English, or Fed for short. The Federal Reserve is an independent institution jointly established by a number of member banks. It was authorized by the U.S. Congress in 1913. Its main role is to stabilize the U.S. financial system through a series of interest-rate-related monetary policies and manage the supply of U.S. dollars, including the amount of currency circulating in the market and the amount of currency stored in banks that can be used at any time. The various policy controls of the Federal Reserve will cause a series of associated economic changes in the actual economic environment. Understanding the Federal Reserve can help investors better manage their personal assets. The full name of the Federal Reserve is "The Federal Reserve System of the United States", its English name is: The Federal Reserve System or the Federal Reserve, and its English abbreviation is Fed. The Federal Reserve is actually the central bank of the United States. It was authorized and established by the U.S. Congress in 1913. At the same time, the Federal Reserve Act was promulgated, which established the main responsibilities of the Federal Reserve. In the entire U.S. economic environment, its most important role is to regulate the currency in the United States through various policies, mainly related to interest rates, stabilize market prices, help maximize employment, and moderate long-term interest rates to help establish a healthy development of the U.S. financial environment. The Federal Reserve is not an affiliate of the U.S. government, but an independent financial institution. It is managed by the Federal Reserve Board (FRB) composed of 12 regional Federal Reserve banks located in different regions of the United States. The 12 Federal Reserve Boards are located in: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco. Source The members with the highest decision-making power include the 7 members of the Board of Governors of the Federal Reserve Board and the 12 presidents of the Federal Reserve Banks. The decision-making power is evenly distributed through systems such as the rotation system. Moreover, the Federal Reserve is an independent institution, and its decisions do not need to be approved by the president or the legislature. The terms of management are longer than those of the president and Congress, in order to reduce the interference of the U.S. president or different political parties in bank operations and capital distribution due to political affiliations. What are the main responsibilities of the Federal Reserve? The Federal Reserve is of great importance to the U.S. economy and even the global economy. Don’t forget that the U.S. dollar is the world’s reserve currency. Any measures taken by the Federal Reserve to regulate the economy will have a profound impact on the global economy. The important responsibilities of the Federal Reserve are: Stabilize commodity prices and control inflation; Guarantee employment rate; maintain moderate long-term interest rates; Maintain the stability of the banking system; With its continuous development after its establishment, its responsibilities have also continued to expand. In addition to its three main responsibilities, it currently includes: Supervise and regulate the business system of the banking industry; Maintain the stable development of the financial industry; Provides financial services to depository institutions, the U.S. government, and foreign official agencies, among others. In order to fulfill the above responsibilities, the Federal Reserve affects the flow of funds in the market by controlling the amount of credit (Credit) in the market and setting the federal funds rate (Federal Funds Rate). Credit in the market, like US dollars, can be used to purchase goods and services. Therefore, increasing the amount of credit can stimulate the economy, while shrinking the amount of credit can cool down overheated economic activities. The level of the federal funds rate will directly affect the interest rate when banks lend funds to the outside world, such as credit card consumer interest rates, loan interest rates, etc., which will play a certain guiding role in market funds. For example, lowering the federal funds rate can usually stimulate consumption, while raising the federal funds rate can stabilize the level of inflation.
At the same time, the Federal Reserve sets the Reserve Requirement Ratio to ensure that all banks in the United States that accept savings account deposits have sufficient funds to cope with users' withdrawal requests. Let’s introduce these monetary policies “Monetary Policy” in detail below: What are the Fed’s monetary policies? When the Federal Reserve performs the above responsibilities, it often uses the following three monetary policies (Monetary Policy): Setting the Federal Funds Rate Buy/Sell U.S. Treasury Bonds (Bond) or MBS (Mortgage-Backed Security) Establish Reserve Requirement Let’s take a look at how the Fed’s monetary policies can perform the above functions: Stabilize commodity prices and control inflation The Federal Reserve controls the currency circulation in the market through different federal funds rates (Federal Funds Rate) and the purchase/sale of U.S. Treasury bonds (Bond) and MBS (Mortgage-Backed Security). When consumers' spending power weakens, the Federal Reserve will stimulate consumption by lowering the federal funds rate. After lowering the federal funds rate, the interest rates for banks to borrow from each other will also decrease. The lending interest rates of each bank, such as credit card consumer interest rates and loan interest rates, will be reduced accordingly. As a result, consumers can receive more money at lower interest rates for more consumption and investment. After stimulating consumption, prices will also rise. When prices rise too fast, the Federal Reserve will regulate it by raising the federal funds rate. When the Federal Reserve raises the federal funds rate, the interest rates for banks to borrow from each other will increase. This increase will then be converted into credit card consumption interest rates, loan interest rates, etc. lent to users. As a result, consumers will reduce borrowing and consumption due to the increase in interest rates, and price levels will begin to decline accordingly. When the Fed adjusts the federal funds rate to achieve the purpose of controlling prices, it also purchases or sells U.S. Treasury bonds to achieve this goal. For example, after the federal funds rate increases, commercial banks will reduce borrowings from the Fed to reduce costs. The Fed cannot effectively absorb excess cash in the market to control prices, so it will absorb funds by selling Treasury bonds to help control rising prices. On the contrary, the Fed can also buy back Treasury bonds to add funds to the market, stimulate consumption, increase prices, and conduct short-term economic regulation. Maintain a reasonable employment rate In addition to maintaining a stable inflation rate, the Fed needs to maintain reasonable employment levels and a low unemployment rate. Through monetary policies, such as lowering the federal funds rate and repurchasing treasury bonds, the Federal Reserve provides funds to the market, promotes consumption, increases the demand for goods and services, stimulates the development of production industries, and strengthens the demand for waiters, thus achieving the role of promoting employment. When the economy enters a stable stage, After the regular period, the Federal Reserve continues to use its monetary adjustment tools to maintain the U.S. economic environment with an average inflation rate of about 2%. A stable inflation rate can make people think that the current economic environment is safe, thereby further stabilizing the development of the market, gradually increasing the employment rate and reducing the unemployment rate. Maintain moderate long-term interest rates When the Fed uses a variety of adjustment tools to stabilize prices, it can provide the market with a moderate long-term interest rate. Therefore, overall, the goals of stabilizing prices and maintaining moderate long-term interest rates are consistent. Maintain the stability of the banking system The original intention of the Federal Reserve was to build a banking system worthy of customers' trust. Before the establishment of the Federal Reserve, there had been several serious bank runs. The so-called bank runs were because under the influence of some factors, a large number of savings customers went to the bank to withdraw cash. When the bank did not have enough cash reserves, customers were unable to withdraw money, causing bank panic.
The Federal Reserve was formally established under this circumstance by promulgating the Federal Reserve Act, which stipulates that U.S. banking institutions must hold deposit reserves (Reserve Requirement) to respond to customers' withdrawal needs. If the reserves are insufficient, they can borrow funds from other banks at a certain interest rate to maintain the reserve of bank funds at a time, reduce or prevent the occurrence of runs, and when a run inevitably occurs, the Federal Reserve can become the lender of last resort to provide a trustworthy banking system for savings accounts. The organizational structure of the Federal Reserve The Federal Reserve is mainly composed of three parts: Board of Governors 12 Federal Reserve Banks Federal Open Market Committee (FOMC) Council The Board of Governors of the Federal Reserve, known as the Board of Governors in English, consists of seven members. The Board of Governors oversees the operations of the 12 Reserve Banks, participates in formulating national monetary policy, and supervises and supervises the entire U.S. banking system. The members of the Board of Directors are appointed by the President and confirmed by the Senate. They serve a term of 14 years and cannot be re-elected. The new director's term begins on February 1 of even-numbered years. The Chairman of the Board of Governors, often referred to as the "Chairman of the Federal Reserve", is appointed by the President from among the current members of the Board of Governors for a four-year term and may be reappointed at the President's option until the expiration of his term. In 2022, the Federal Reserve Chairman is Jerome H. Powell. 12 Federal Reserve Banks The Federal Reserve Act divides the United States into 12 regions based on the population distribution of the United States. It is composed of 12 Federal Reserve banks in the 12 regions. Each bank serves the member banks in its region, and also supervises the local member banks and participates extensively in the economic activities of its jurisdiction. Each Federal Reserve Bank has nine directors, one of whom serves as chairman and one as vice chairman. The chairman's term is five years and can be reappointed. District Code Current Chairman of the Federal Reserve Bank Boston Kenneth Montgomery New York City John C. Williams Philadelphia Patrick T.Harker Cleveland Loretta J. Mester Richmond Thomas Barkin Atlanta Raphael Bostic Chicago Charles L. Evans St. Louis James B. Bullard Minneapolis Neel Kashkari 10 Kansas City Esther George 11 Dallas Meredith Black (acting) 12 San Francisco Mary C. Daly Federal Reserve Open Market Committee (FOMC) The Federal Open Market Committee, in English, is the Federal Open Market Committee, or FOMC for short. The "Federal Reserve meeting" that everyone talks about refers to the FOMC meeting. The FOMC meeting can be said to be the main meeting for members of the Federal Reserve to formulate U.S. monetary policy. It is crucial to the economic trends of the United States and the world. Participants at the FOMC meeting mainly include 7 Board of Governors members and the presidents of 12 Federal Reserve Banks. All participants can participate in the committee's discussion and evaluation of economic and policy options, but only the 12 members who serve on the Federal Open Market Committee at the time can vote on the final monetary policy. The 12 FOMC meeting members include 7 Board of Governors members, the President of the New York Federal Reserve Bank, and 4 other Federal Reserve Bank presidents, mainly rotated regularly by the presidents of the other 11 Federal Reserve Banks. The Federal Open Market Committee normally meets eight times a year in Washington, D.C., in formal meetings and eight telephone consultations, and may convene additional meetings as needed. In 2022, the Federal Reserve’s FOMC meeting schedule is as follows:
FOMC meeting schedule January 25-26 March 15th and 16th May 3rd to May 4th June 14th and 15th July 26-27 September 20-21 November 1st to 2nd December 13th and 14th The history of the Federal Reserve? Before the establishment of the Federal Reserve, there were two "national banks" in the United States. . In 1791, then-President George Washington issued a 20-year currency issuance right to the then national bank, the First Bank of the United States, in exchange for the bank's support for the government. The federal government subscribed to the Bank of the United States' funds, and the Bank of the United States provided loans to the government. As a result, the Bank of the United States became the only financial agent of the federal government. The Bank of the United States also engaged in commercial banking business. However, some other states, especially the autonomous states in the west and south, believed that the Bank of the United States' operating model was essentially taking care of the interests of a small group of elites and wealthy people at the expense of the interests of the majority of the ordinary people. They formed an alliance and organized the Bank of the United States to obtain a charter again in 1811. This time, a single bank served as the financial support of the government and did not take into account the entire American people. The right to issue currency was in the hands of a few people, which violated the spirit of the U.S. Constitution, so it failed. In 1816, President James Madison established the Second Bank of the United States States), and his successor Andrew Jackson opposed the central bank system, so he withdrew government funds from the Second Bank of the United States, making 80% of the assets of the Second Bank of the United States privately owned. During the same period, the development of the United States was affected by many outside countries, the economic war with the United Kingdom, and the regional conflict with Canada. As a result, the Second Bank of the United States was unable to play a good role in maintaining and promoting the federal economy. In 1836, the Second Bank of the United States lost its status as a central bank. From 1837 to 1862, the United States had no formal central bank, forming an era of free banking. In 1846, an independent treasury system was established to manage government assets, but this system ended in 1921. In 1863, the federal government issued the National Bank Act and established a national banking system. However, the imperfection of the system led to a series of bank panics and serious bank runs in 1873, 1893 and 1907. Especially the severe bank panic in 1907 prompted legislators, bankers and economists to clarify the importance of establishing a sound banking system. On December 23, 1913, the federal government issued the Federal Reserve Act, thus announcing the establishment of the Federal Reserve. According to the historical summary of the development of the past banking industry, the Federal Reserve System needs to establish balanced reserve bank distribution points across the United States based on population distribution. At the same time, the important management of the Federal Reserve Bank must be jointly held by people who represent the interests of the banks and the interests of the people. As an independent institution, the regulations issued by the Federal Reserve do not need to be approved by the President of the United States or Congress, but are subject to the supervision of the President and Congress at the same time. This ensures that the Federal Savings System can serve all American citizens, not a small number of wealthy people. At the same time, through the regulation of the Federal Reserve System, it plays the role of stabilizing prices, increasing employment and maintaining moderate long-term interest rates. During the Great Depression of the 1930s and the financial crisis in the early 21st century, the Federal Reserve helped the federal government survive the crisis and quickly put the economic environment on the track of recovery after the crisis. As a result, the Federal Reserve's responsibilities have been continuously expanded. What is the difference between the Federal Reserve and general commercial banks? The Federal Reserve is composed of 12 main Federal Reserve banks and several member banks. Banks within the Federal Reserve System can facilitate the auction of U.S. Treasury bonds and become banks of the Federal Reserve System, which can be called national banks. Federal Reserve General Commercial Bank central bank non-central bank Set U.S. monetary policy Does not specify U.S. monetary policy Management is appointed by the President and Congress of the United States Designated by management Composed of members of the Federal Reserve System Managed by an independent company or individual Management has a strict tenure rotation system The term of office of managers is determined according to the bank’s own banking system.
Serving the federal government and the public serve the people The operations of the Federal Reserve System are regulated by the President and Congress of the United States The operations of general commercial banks are supervised by the Federal Reserve and other financial institutions. More macroeconomics What is the Federal Reserve Balance Sheet? Explore the Fed’s 24 primary dealers What is the National Financial Conditions Index? Published by the Chicago Fed What is the Buffett indicator? Buffet Indicator What is the U.S. Treasury Volatility Index? Move Index What dollar index? US Dollar Index What are bank deposit reserves? Bank Reserves What are open market operations? Open Market Operations What is the reserve balance interest rate? Interest in Reserve Balances What is the Personal Consumption Expenditure Index? PCE Price Index