Overview of the Federal Reserve System
The Federal Reserve System, often called the Fed, is the central banking system of the United States, established by the Federal Reserve Act of 1913. It serves as the nation's primary monetary authority, overseeing banks, maintaining financial stability, and regulating the money supply to achieve goals like maximum employment, stable prices, and moderate long-term interest rates.
Structure and Key Components
The Fed comprises the Board of Governors in Washington, D.C., 12 regional Federal Reserve Banks, and the Federal Open Market Committee (FOMC). The Board sets national policy, while regional banks implement it and provide services like check clearing. The FOMC, which includes the Board and select bank presidents, directs open market operations to influence interest rates and economic activity.
Practical Example: Influencing Interest Rates
During the 2008 financial crisis, the Fed lowered the federal funds rate to near zero and initiated quantitative easing by purchasing securities, injecting liquidity into the economy. This reduced borrowing costs for businesses and consumers, stimulating spending and investment to prevent a deeper recession.
Importance in US Economic Policy
The Fed influences economic policy by controlling inflation and unemployment through tools like reserve requirements and discount rates. Its independent decisions help insulate policy from short-term political pressures, ensuring long-term economic health, though it collaborates with the Treasury on fiscal matters for broader stability.