Weekly SmartPills #30
AN INTRODUCTION TO THE FEDERAL RESERVE SYSTEM
In the vast world of central banks, few institutions carry the weight and influence of the Federal Reserve, commonly known as the FED. This body, established in 1913, has seen the United States through some of the most tumultuous moments of the twentieth century and beyond.
The rise of Nazism, the Cold War, and the recent COVID-19 pandemic are just a few of the major events the FED has had to face.
In this article, we will take a brief journey to discover the FED: we will explore its structure, its duties, and the responsibilities it bears. In an interconnected world, understanding how it works is essential, as the decisions made by this institution can have direct impacts on global economies and people’s lives.
What is the FED?
The Federal Reserve, or Federal Reserve System, is the central bank of the United States of America. Founded with the Federal Reserve Act of 1913, it is a cornerstone of the U.S. economy. Its responsibilities are clearly defined: ensuring price stability, maintaining sustainable interest rates, and promoting favorable conditions for the labor market. In other words, the FED plays a key role in managing the money supply and the economic stability of the country.
However, its influence extends well beyond the borders of the United States.
Since the American economy is deeply interconnected with the world, the FED’s decisions can have a significant impact on a global scale. Its actions can influence financial markets, foreign currencies, and the economic stability of distant nations.
The Federal Reserve has a complex structure that reflects its importance. This structure is based on four main components:
Board of Governors: This body is composed of seven members appointed by the President of the United States and confirmed by the Senate. It is responsible for overseeing banks and regional districts.
In addition, it sets monetary policies, including interest rates.Federal Open Market Committee (FOMC): The FOMC is one of the most closely followed committees in the field of macroeconomics. Approximately every forty days, it makes key decisions regarding U.S. interest rates, which can have a global impact.
Regional FED Banks: The United States is divided into twelve districts, each with a regional FED bank. These regional banks are tasked with overseeing financial institutions and member banks operating within their districts. The system is designed to ensure nationwide coverage.
Member Banks: Member banks are financial institutions that hold shares in the regional FED banks. These banks contribute to financial stability and the implementation of the FED’s policies.
The main headquarters of the Federal Reserve is located in Washington, D.C., within the imposing Eccles Building. However, the Federal Reserve System extends nationwide, with twelve regional banks located in some of the most important cities in the United States, including Chicago, Boston, New York, San Francisco, and Dallas.
Who is the Chairman of the FED?
Jerome Powell, a Republican, currently serves as Chairman of the Board of Governors, the highest-ranking position within the Federal Reserve. Born in 1953, Powell has a high-level legal and banking background. After graduating from Princeton and Georgetown, he went on to build a successful career in the investment sector and held important positions in the financial field.
In 2018, he was appointed Chairman of the Federal Reserve by U.S. President Donald Trump. Powell has managed an economically tumultuous period, leading the institution through the COVID-19 pandemic and the resulting inflation challenges.
Understanding how the FED works is essential for those who invest or are interested in global finance.
And for clarity, it's important to distinguish between the Federal Reserve and the Securities Exchange Commission (SEC), which is responsible for regulating financial markets but has no authority over monetary policy.