Do you know what the Federal Reserve is? Most people don’t. It’s okay, it’s got a pretty complex role in our economy and its work is usually behind the scenes. But it’s super critical and impacts our lives every day, so we should know at least the basics. To use a weather analogy, it’s not the wind or the rain itself, but rather the thermals and pressure systems that cause the wind and the rain. Just hang with us, we’ll explain. 😁
The Federal Reserve (“the Fed”) was created in 1913 in response to the financial panic of 1907. The initial purpose was to maximize employment, stabilize prices, and moderate interest rates. Since then its mission has expanded a bit, but the general idea is the same - to shepherd the nation’s economic well-being.
Let’s see how they do that.
Here are Five Fast Facts about the Fed:
- 🧱 The Structure - The Fed is actually a multi-layered organization. It is run by a group of seven Governors appointed by the President, as well as 12 regional Fed bank presidents (there’s a voting rotation so only five will vote at a time). The big national banks are required to hold stock in their region’s Fed bank. Skin in the game, right?
- 📈📉 Interest Rates - One of the Fed’s main jobs is to manage interest rates. This happens through the rate charged by the Fed to banks themselves. Depending on the economic situation, the Fed adjusts the interest rate to banks up or down (like to combat inflation), and that gets passed along to consumers like you and me. Whether we like it or not…
- 🤝 Hiring Practices - The Fed also influences hiring practices by the amount of money it provides to banks for business expansions. If they expect an economic slowdown they will give more money to banks for businesses to hire more people; lowering interest rates prompts more consumer spending, which helps businesses grow without direct money from the banks. They’re basically just pulling levers here to get a result over there.
- 🏦 The Bank Of Banks - The Fed serves as the “bank of banks”, meaning they provide money to banks, dictate how much cash banks have on hand, and monitor that savings deposits are safe so that the bank doesn’t run out of cash. Or maybe it's a nanny of banks?
- 💰 Overall Financial Stability - Hang with us on this one, it can get a bit complex! To maintain the overall stability of America’s economy, the Fed also controls the money supply. This refers to how many dollars are floating around out in the country (or world). Remember: basic economics is supply and demand. The more of something there is, the lower its value. So, if more money is printed and put into circulation, the lower the value -- or buying power -- of each individual dollar. You know how Congress passed multiple multi-trillion dollar bills in the last couple of years? That dumped massive amounts of money into the economy, which means the value of each dollar goes down. That’s what gave us such high inflation. To counter that inflation, the Fed then brought interest rates up, making it more expensive to borrow money and to buy pretty much everything. It’s a balancing act where market forces are pushing and pulling in many directions at the same time!
🔥Bottom line: Whew! Did you get all that? Like we said, it’s complex. The bottom line is that the Fed pushes most of the major economic levers for the country, and what they decide indirectly impacts not only our Paychecks but also things like the cost of what we buy, the interest rates we pay, and more. They don’t have direct control, but their actions ripple out through the businesses and services we do have direct contact with, and that’s where we feel the results.
What do you think of the Fed?
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