Last week, I talked about Interest Rates and I mentioned I would expand on the Federal Reserve. Today, I want to briefly write about the key points to the Federal Reserve System: what it is, what are its goals, its structure, and why people dislike it.
This is another topic that has plenty of books written about it which I have no intention of writing. This is going to be brief post about a huge topic that I would like to keep expanding on in later posts.
What is the Federal Reserve System?
Also know as the Federal Reserve, and what most people call it, “The Fed.” It is the centralized bank for the United States, which was created in 1913 with the Federal Reserve Act after a number of financial panics. The Fed is in charge of the monetary policy of the United States. The Fed considers itself an independent central bank because none of their decisions need to be approved by anyone in the government. This is technical true but many people are debating whether the Fed is actually an independent entity.
I’ll discuss the difference between monetary policy and fiscal policy in a later post. All you really need to know for now is that monetary policy controls the money supply and fiscal policy controls taxes and government spending.
Side Note: Who doesn’t love a good panic? This will definitely be a future blog post. For now, a panic is basically when a bunch of people lose their minds about the markets. See Tulipmania.
What are the Fed’s goals?
The three main objectives of the Fed are the following¹:
- Maximum employment
- Stable prices
- Moderate long-term interest rates
The first two are referred to as the Fed’s dual mandate, which you’ll hear thrown around in newspapers or CNBC.
What is the Fed’s structure?
The Fed consists of a presidentially appointed Board of Governors or Federal Reserve Board, partially presidentially appointed Federal Open Market Committee (FOMC), non presidentially appointed twelve regional Federal Reserve Banks which are located in major cities around the country, and a number of privately owned U.S. Banks.
Why people hate the Fed?
This just my opinion and it’s based on the fact that the Fed really can’t win no matter what it does.
- If they save the country from entering a major depression then they’re wasting money.
- If they do nothing then the Fed is lost and doesn’t know what actions need to be taken.
- If they lower interests rates or keep them low then their killing the businesses of the banks and mutual fund companies, and causing higher inflation.
- If they raise interest rates, the market hates them and they’re destroying businesses that are happy with all the cheap cash flying around.
This causes everyone to not only follow every move of the Fed but it also makes people to hate them, which is why there are many people want to get rid of the Fed all together. The one thing I know about the Fed is that rates will rise one day and they’re going to make a lot of people happy and angry.
* You can find most of this information on the Wikipedia page for the Federal Reserve.