How does the US Federal Reserve Works

How does the US Federal Reserve Works

The US Federal Reserve is one of the most important financial institutions in the world and currency traders usually pay a lot of attention to its actions.

Therefore it will be interesting to explore the inner workings of the institution. The Federal Reserve or the FED is the central bank of United States; it has been established since 1913. Its main goals are to conduct the monetary policy of the country, to supervise banks and to provide liquidity and financial services to the government and to various depository institutions. The FED consists of 12 member banks that are located throughout the whole country, from the Washington-based Board of Governors, and last but not least – the Federal Open Market Committee (FOMC).
Many people usually would like to know, who owns the FED. It is actually a governmental organization and is not owned by anybody in particular. In addition to that it has a private element in it. Each of the regional Fed banks has its own board of governors and issues stock to commercial banks, which are required to purchase shares in equal value to 6 percent of their capital. Having stock form the FED however does not equal to ownership and control. Furthermore, the Board of Governors that is located in Washington and not the local boards are responsible for the regulatory functions.

Fed usually influences the economy through so called open-market operations. Each of the member banks have deposits with FED and can lend to other banks at the so called “Fed funds rate”. This rate is crucial for the whole economic system and it feeds through the other rates. When inflation fears increase, the Fed increases the fed funds rate (called a “tightening”) in order to slow activity in sectors of the economy, such as housing and automobiles, that are particularly sensitive to interest rates. When the economy slows, the Fed reduces the fed funds rate in order to stimulate activity (“loosening”).

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