The Fed is an acronym for the central bank of the U.S. called the Federal Reserve. The Fed includes the 12 branches of the Federal Reserve, the national banks, the state chartered commercial banks and some of the trust companies. As the most important government authority in the US it is the issuer of the American currency and performs all the functions of the central bank. It was created nearly a century ago in 1913 by the US Congress when the need arose to have a formal organization to implement the monetary policy and instill public faith in the banking system. The Fed is an independent organization whose activities although are reviewed by the US government periodically, its decisions do not have to be cleared by the President. The Fed’s operations are carried out under the leadership of a board of governors, who have a chairman and deputy chairman at the head. It exerts a lot of influence on the US economy and helps to preserve the pace of economic growth.
Functions of the Fed
- The Fed is the bankers’ bank since it provides all the requisite services to all the financial institutions in the US and thus ensures a smoothly functioning national payments system.
- It serves as the Government’s bank, by handling all the government receipts and payments, as well as its bonds and securities.
- The Fed issues the national currency-both paper and coins. Though the Treasury of the US government produces the cash, it is the Fed that distributes it to all the banks and other financial institutions.
- The Fed serves as the regulator and supervisor of all the banks by monitoring all bank related activities.
- Implements the monetary policy of the government and serves as the money manager of the country. This gives it the authority to decide on the need for tightening the money supply to control inflation or expand the money supply to encourage spending. The Fed through its role in the formulation and implementation of the monetary policy, affects the employment levels, prices and economic growth. The three main tools it uses for this purpose include the discount rate, the open market operations and reserve requirements. With deft manipulation of rates it is able to ensure smooth and sustained growth.
The Fed is an extremely powerful and influential regulatory authority not just in the US but also provides policy cues to other countries in the world. It has a deep impact on the day to day lives of the citizens, helping them by keeping their economic interests in mind while formulating polices and issuing directives, and also keep track of the economic activities of other countries. It has a major role to play in the world economy since its policies set the tone of global development.
