The Federal Reserve, or the Fed,
is the central bank of the United States.
So what's the difference between the Fed
and a commercial bank like this one?
Let's say I use a bank to deposit
and withdraw cash or to take out a loan.
When I deposit money at a bank,
the bank doesn't just hold on to my cash,
it lends it out to other customers.
The bank serves as an important
middleman in the economy.
But if everyone tries to take out
money at the same time,
a bank might not have enough cash on hand.
That's when a central bank could step in
to lend extra cash
so the bank can stay open.
The U.S. Congress created the Fed
in 1913 after a series of financial panics
to stabilize and supervise
the country's banking system.
The Federal Reserve Act
established the Fed as a bank to other banks,
where it cleared checks and provided currency.
Congress also tasked the Fed
with what would become
its most important job,
conducting monetary policy.
Monetary policy is how the Fed
changes interest rates,
basically the amount you, the borrower,
can be charged for borrowing money.
Fed interest rates can affect anything
from how much you pay for
a car loan or a home mortgage.
The Fed funds target rate
determines how much banks pay
to lend to each other,
which in turn affects
the amount of money businesses
and consumers have to spend.
When the Fed sets its target rate
it has two key goals in mind
stable prices and maximum employment.
The Fed wants prices to stay stable
so you can plan your current and future budgets.
Think of Germany where the
price for a loaf of bread
increased from one mark in 1918
to 200 billion marks five years later.
The Fed also has to keep
a close eye on employment.
If unemployment is high,
the Fed lowers interest rates to
encourage businesses and consumers
to borrow and spend their money
instead of saving it.
That's what the Fed did
during the financial crisis.
When the unemployment rate spiked
in 2008, the Fed lowered its key rate to zero.
It also took unprecedented steps
to lower rates by buying assets
like government bonds
from financial institutions.
This pumped money into the economy
to encourage banks to lend.
The Fed's policies have
helped the jobs market recover
but not everyone is happy,
especially savers who have
basically made no interest on
their money in the bank
for the past 10 years.
Some have even called to
abolish the Fed altogether.
Some politicians
have called the Fed political
for keeping interest rates so low.
But even though the Fed is
ultimately held accountable by Congress,
it operates as an independent entity.
The Fed is made up of the Board of Governors
which includes seven members called Governors
including the Fed Chair and Vice Chair.
Fed Governors are appointed by the President
and approved by the Senate.
The Fed also includes 12 regional reserve banks
in cities across the country.
Each regional bank has its own Fed President.
Governors and rotating Fed Presidents
meet eight times a year in Washington
and they vote on where to set rates.
Other central banks around the world
and traders keep a very close eye
on Fed decisions.
That's because the smallest
change in Fed policy can ripple
throughout stock markets
ultimately down to your own pocketbook.