If you are interested in how the American economic system works, sooner or later you will come across the "FED". This term refers to the US central bank system that coordinates American monetary policy. In this article, you will find out exactly what the system is, how it came about historically, what its tasks and objectives are and how these can be implemented.
FED definition
The term "FED" stands for "Federal Reserve System". This is the American central bank systemwhich consists of twelve central banks exists. The FED is responsible for monetary policy in the USA. One of its most important tasks is to control the amount of money in circulation in dollars. In addition, the American banks are supervised by the system.
The system takes over the Monitoring financial and monetary stability of the country. The members of the system are appointed by Congress. Nevertheless, the institution is supposed to maintain its independence, make its own decisions and not be influenced by politics.
History of the FED
The need for the system was recognized due to economic problems clear. One problem was that before the establishment of a common Fed, the American monetary system consisted of numerous private banks.
Everyone had the right to issue their own banknotes. The practical implementation of redeeming the issued notes in gold often did not work. Notes that had already been issued lost acceptance, which made them worthless.
Some Financial crises from the 19th and 20th centuries contributed to these problems. A large number of banks collapsed. These led to Liquidity problems and an economic crisis.
The FED was founded as a result of these problems. The aim was to create a effective control over the money supply and the American banking system. The Federal Reserve Act, which was passed by Congress in 1913, was drafted for this purpose.
What are the tasks of the FED?
The overriding objective of the system is to coordinate and monitor the supply of money. In addition, the system focuses on ensuring a stable American financial system. The following tasks are central to the activities of the central bank system:
- Supervision of banksBanks and other financial institutions are regulated by the US Federal Reserve System. The system monitors whether banks comply with the law and ensures that they remain financially stable. It also controls whether banks enter into risky transactions.
- Monetary policy measuresThe Federal Reserve System coordinates and monitors interest rates in the dollar area and controls the amount of money in circulation. Appropriate monetary policy regulations are set and implemented by the FED.
- Currency stabilityA central task is to ensure the stability of the dollar. To this end, various instruments are used to avoid strong currency volatility.
- Secure payment processingThe system is responsible for ensuring that payments between financial institutions and banks can be carried out securely and efficiently. A stable financial system must be available for this purpose.
- ResearchIn addition, research is carried out to help gain a better understanding of the current economic situation. This data is used to make well-founded decisions. This also includes the creation of forecasts to enable realistic assessments.
- Crisis managementThe system supports financial institutions in distress in order to stabilize the financial system.
What instruments does the FED use?
The FED can use various instruments to achieve its own objectives:
- Open market transactionsThe Federal Reserve System can buy and sell government securities. This allows it to actively influence the liquidity of the banking system and control the overnight interest rate among banks.
- Minimum reserve: Balances on transaction accounts are subject to a minimum reserve. An important difference to the Eurosystem is that the American system counts cash held by credit institutions towards minimum reserves.
- Permanent facilitiesThe Federal Reserve System can grant loans to credit institutions.
- Key interest rateThe key interest rate is charged to banks when they want to borrow money from the Federal Reserve System. This instrument can also be used to achieve certain monetary policy objectives. Low interest rates can be used to combat a weak economy.
How is the FED structured?
The Federal Reserve System consists of 3 different institutions:
- Federal Open Market CommitteeThe FOMC focuses on financial policy open market decisions and setting policy in relation to the foreign exchange market. It consists of seven members of the Board of Governors and five presidents of the twelve presidents of the Federal Reserve Banks.
- Board of GovernorsThis is the supreme supervisory body based in Washington. Its tasks include discount policy, minimum capital requirements for securities purchases, consumer protection regulations and rules on minimum reserve requirements. The term of office of the seven members, who must be appointed by the US President and confirmed by the Senate, is limited to 14 years.
- Federal Reserve BanksThis is the executive body of the system. This includes operational tasks relating to payment systems, the issuing of banknotes and the supervision of banks. Members are private banks. Above a certain size, private banks are obliged to be members of the Federal Reserve System.
Conclusion: What is the FED?
The FED, or Federal Reserve System, is the American central bank system consisting of twelve central banks. The need for such a system arose from economic problems. Thus the Federal Reserve Act was passed by Congress in 1913.
The system consists of three institutions: The Federal Open Market Committee makes open market financial policy decisions and determines policy via the foreign exchange market. The Federal Reserve Banks are participating private banks. They are the executive body of the Federal Reserve Systems. For example, the Board of Governors is responsible for the discount policy and for regulations relating to consumer protection.
The FED performs important tasks such as Coordination of monetary policy measures or the guarantee of the Currency stability. The Federal Reserve System also supervises banks and ensures secure payment processing. Crisis management and research are also carried out by the Federal Reserve System.
With the help of various instruments, the FED can ensure that the tasks and objectives can be implemented and realized appropriately. These include standing facilities, minimum reserves, open market operations and the key interest rate.