What is ‘The Fed’?
The US Federal Reserve, also known as the Fed, is the central bank of the United States, mandated to provide the country with a stable monetary and financial system.
It was established in 1913 by the Federal Reserve Act to prevent further economic disruptions such as bank failures and business bankruptcies following the financial crisis of 1907.
The Fed comprises 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the United States. Its duties include conducting national monetary policy; supervising and regulating banking institutions to protect consumers’ rights; maintaining the stability of the financial system; and providing financial services (which includes operating the national payments system and depository institutions).
The Fed is made up of a Board of Governors who are nominated by the President and approved by the US Senate. The governors are responsible for setting reserve requirements. This is the amount of money commercial banks are required to hold to ensure they have enough to meet sudden withdrawals. The Board of Governors also sets the discount rate, which is the interest rate the Fed charges on short-term loans to financial institutions. These discount loans are intended to be primarily an emergency option for banks in distress.
The Federal Open Market Committee (FOMC) is the Fed’s main monetary policymaking body. To set monetary policy, the committee directs open market operations (OMOs). This is the process of buying or selling US Treasuries, along with other securities, on the open market in order to manage the money supply. Through this the Fed can adjust the federal funds rate and therefore the amount of money and credit available in the economy.