Anyone who has heard or read media reports about the economy has probably heard about the Federal Reserve Bank. However, unless you’re an economist, you’re probably not familiar with precisely what this government entity is or how it functions.
What Is the Federal Reserve Bank?
It’s easiest to think about the Federal Reserve as America’s central bank. The function of the Federal Reserve in the U.S., as is the case with the central bank in many countries, is to control the prevailing interest rates. They are also in charge of the money supply and responsible for oversight of the entire banking system.
Why a Federal Reserve?
Just like many other countries, the U.S. has a central bank to help provide stability to the economy. Unlike many other countries, America waited until quite recently, 1913 to be exact, before establishing a central bank. The Federal Reserve was created largely in response to a series of economic panics that happened frequently in the second half of the 19th century. Their responsibilities have grown considerably in the decades since.
What Does the Federal Reserve Do?
The highest echelon of the Federal Reserve is the Board of Governors. These officials are responsible for setting the relative value of the American dollar. They do this by controlling the supply of money through open market operations, like purchasing or selling treasury securities. Moreover, the Federal Reserve states that its purpose is to “provide the nation with a safe, flexible, and stable monetary and financial system.” Some of their goals include ensuring full employment and keeping prices stable and predictable. They may shape monetary policy to help fulfill these goals.
Perhaps one of the most important roles of the Federal Reserve Bank is that of overseeing other financial institutions. Essentially, the Federal Reserve ensures that banks comply with federal laws so that consumers are treated predictably and fairly. The Federal Reserve also insures the money that people deposit with their bank so that they can recoup their losses if the bank fails or closes down.
Because of the Federal Reserve, Americans can trust the banks where they deposit their paychecks. They also enjoy better employment opportunities and can also rely on more predictable prices on the goods and services they purchase every day. Without the Federal Reserve, it is likely that the economy would be unstable and that there would be a greater number of economic panics.