How does the Federal Reserve System Work? The Federal Reserve System, created by Congress in 1913, is responsible for overseeing the health of the financial system and regulating the banking industry. Understanding the Federal Reserve System requires breaking down its primary responsibilities and how they impact the economic health of the United States.
Going Up and Coming Down
Chief among the roles of the Federal Reserve System is to monitor and influence the health of the nation's economy. One of the ways in which the Federal Reserve System influences the economy is by controlling the amount of money in circulation.
When spending is rampant and the economy faces inflation, the Federal Reserve System tightens control of monetary resources, bringing spending and the risk of inflation down. When times are tight and the economy needs a boost, the Federal Reserve System loosens control of monetary resources, making borrowing easier and making more money available, boosting spending.
Keeping Businesses Afloat
One of the functions of the Federal Reserve System is as a lender to vital institutions in times of crisis. The Federal Reserve System loans money to these institutions, stemming off panic and keeping them going. While there is a cost for loaning money to institutions in crisis, the cost would be higher if those institutions failed entirely, affecting the entire economy.
The National Payments System
Another aspect of the Federal Reserve System's services is supporting depository institutions. The Federal Reserve System provides payment services for member depository institutions, such as transferring funds, collecting checks and handling currency. The Federal Reserve System's Federal Reserve Banks also handle transactions for the federal government, including paying Treasury checks, processing transactions for US government securities and processing electronic payments.
The Board of Governors and the Federal Open Market Committee
Both the Board of Governors and the Federal Open Market Committee play an important role in carrying out the responsibilities of the Federal Reserve System. The Board of Governors is primarily responsible for overseeing the Federal Reserve System itself, while the Federal Open Market Committee is the monetary decision-making body.
The Federal Open Market Committee holds regular Federal Reserve meetings, analyzing current economic indicators and making important monetary policy decisions. The Federal Open Market Committee is responsible for raising and lowering interest rates to encourage and discourage spending, and making decisions on economic policy to influence the United States economy.
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