In June 2015, The Federal Reserve announced that it would not be raising interest rates
because the US economy couldn’t handle the change.
They also lowered their expectations for the coming year in terms of economic growth.
But, what does any of that mean?
What is the Federal Reserve, and how do they affect the economy?
Okay, so the Federal Reserve, or “The Fed” is the US’s central bank.
This means that they oversee all American banks, and are the only ones allowed to issue
US currency.
Essentially, they regulate the American economy, and that means they wield a lot of power and
responsibility.
One of their most significant roles is changing interest rates in order to keep the US economy
in check.
The way it works is like this: The Fed is what lends money to all US banks at a certain
interest rate.
Whatever interest rate they charge is going to correspond with the interest rate your
bank charges you.
When interest rates are low, people borrow more and spend more.
This stimulates the economy.
Following the 2007 financial crash, the Fed dropped rates to nearly zero in the hopes
that it would encourage people to spend.
On the other hand, when the economy is strong, people spend more, causing inflation.
If the rate of inflation gets too high, then prices skyrocket, and the economy crashes.
So when things are going a little too well, the Fed raises interest rates to keep everything
on track.
It is by raising and lowering interest rates that the Fed tries to balance America’s
financial situation.
The Fed was originally created in 1913 as a response to the Panic of 1907.
At the time, private banks across the country were running out of money.
In order to stop the market from crashing, banker J.P Morgan took control of the banking
industry and got stronger banks to help out failing banks.
Basically, the Fed was created to similarly regulate and direct banks, and to be able
to inject money into the economy when necessary.
But with so much responsibility, the Fed has been pointed to as a major factor in both
the 1933 Great Depression, and the 2007 recession.
In terms of the recent housing bubble, they were blamed for keeping interest rates low
after a minor 2001 recession.
This led to low-interest borrowing across the country, and was one of the reasons people
borrowed money for houses they couldn’t afford.
The Fed is also directly responsible for a period of extreme inflation and high unemployment
during the 1970s, caused by the overprinting of money.
They’ve also been criticized for a lack of transparency in their operations.
The Federal Reserve has been a common topic of contention for politicians and those unhappy
with the current US economy.
Whether or not it should be government controlled, or even exist at all are difficult questions
to answer.
At the very least, it’s important to consider the relevant effect they have on keeping America’s
economy at a steady rate of growth.
With such a high amount of debt to itself, banks, and foreign countries…
can the US still call itself a wealthy nation?
Check out our video here to learn all about it.
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