Bernanke, Yellen, Powell… we’ve all heard of the Fed and its chairmen – but what actually is the Fed and what does it do?
These days it seems if you read financial news (or any news in fact), you are going to encounter hype about central banks and interest rate hikes. Terms once considered banker jargon, now make media appearances in every other sentence.
You might have seen recently that the “the Fed” made their routine announcement regarding interest rates. This will happen several more times in the US before the end of 2019, so we thought we’d explain what exactly this stately body is – and what it does.
Who and what is the Fed?
Central banks, or reserve banks, manage a nation’s money. The US Federal Reserve is the central bank of the United States.
President Woodrow Wilson created The Fed on December 23, 1913 with the enactment of the Federal Reserve Act.
However, the origins of central banking in the US began with the Constitution and the first secretary of treasury, Alexander Hamilton. You may have heard of him from that hit Broadway show… Hamilton. He is also on the face of the $10 bills you use to pay for your lunch if you live in the US.
Hamilton’s dream was to create a central banking system to repay the young nation’s debts, provide credit to business and establish national currency. Parts of his plan succeeded, while some failed. Over the next century the system evolved into what it is today.
Our current system is comprised of twelve Federal Reserve district banks each led by a Governor, who is appointed by the US President for a term of 14 years. The President also appoints seven of the district Governors to the all-important Board of Governors, of which two are appointed chair and vice-chair.
The Board is responsible for setting US monetary policy – largely, the setting of interest rates.
The current chairman of the Board is Jerome Powell, with his predecessors being Janet Yellen and before that Ben Bernanke. Names you may have heard before.
While the Board of Governors is an independent government agency overseen by Congress, The Federal Reserve Banks are private corporations. This structure was deemed optimal to ensure that The Fed operates independently from the government and is less impacted by political volatility.
What the Fed does
The most visible task The Fed undertakes is setting interest rates eight times a year to ensure that the economy grows and inflation doesn’t get out of hand. The Fed must try to keep inflation as close to a target of 2% as possible.
The statutory objectives are maximum employment, stable prices and moderate long-term interest rates.
But what does that mean in English? In general, when interest rates are low, economic activity increases due to the low cost of borrowing, and the reverse happens as interest rates rise. The fed is also tasked with bank supervision and regulation and oversight of an effective payments system (ATMs and wires).
The Fed is unique from other central banks and is not tasked with printing the domestic currency. This is the responsibility of US Treasury Department.
However, the New York Federal reserve bank does house gold on behalf of the US government, as well as foreign governments, other central banks, and official international organizations.
You can tour the Fed’s museum and gold vault for free, so next time you find yourself in NYC, be sure to check it out!
Fed Fun Fact
The US Secret Service (USSS) was founded in 1865 to combat then-widespread counterfeiting of the US dollar.
Today, the USSS remains the primary government agency responsible for safeguarding the US payment and financial systems.