6) The Federal Reserve: Conclusion

They say that “money makes the world go round,” and couldn’t this be more true now that you’ve learned a lot about the Federal Reserve?

The power and influence that the Fed holds over the financial markets in the US is something to ponder. It is so influential that even other countries and their markets are affected by the monetary decisions made by the Fed. Many countries even make policy changes based on decisions made by the Fed.

Let’s review some of the major points discussed in this guide.

  • In 1913, the Federal Reserve Board was created with the task of making a safer, more flexible, reliable and stable monetary and financial system in the US.
  • The Fed is led by seven presidential appointees called the Board of Governors.
  • There are twelve Federal Reserve Banks, or District Feds, that act as the operating arms of the Fed.
  • The policy-making branch of the Fed is the Federal Open Market Committee (FOMC).
  • The Fed is mandated by the US government “to promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates.”
  • The Fed is the guardian of the US economy. It implements economic and monetary policies to keep the economy working smoothly.
  • There are 3 tools by which the Fed influence monetary policy: discount share, reserve requirements, and open-market operations.
  • Open-market operations is the most frequently used tool to set a target for the federal funds rate (FFR).
  • To boost economic growth, the FOMC will reduce the FFR, or increase it to slow down the economy. The FOMC buys and sells securities in accordance with the decrease or increase of the target rates, respectively.
  • Reducing the target rate simply means that the Fed is putting more money into the economy, while increasing the rate is the opposite. It is always good to borrow money for a car or housing loan when the target rate is lower.