All you need to know about the Federal Reserve

All you need to know about the Federal Reserve

The Federal Reserve or the Fed is considered the central banking system of the United States. There are 12 in total on the head of 12 Federal Reserve’s districts created under the Federal Reserve act of 1913. These banks are jointly responsible for the implementation of the monetary policy established by the Federal Open Market Committee.

They are the latest institutions created by the U.S. government to provide central bank jobs. Previous institutions included the first banks (1791-1811), the second (1818-1824) in the United States, the Independent Treasury (1846-1920) and the national banking system (1863-1935). Many policy-related questions have arisen with these institutions, including the degree of influence of special interests, balancing regional economic concerns, preventing financial panic, and the type of reserves used to support the currency.

Due to the financial disaster known as the 1907 panic threatened many New York banks with bankruptcy, a result that was avoided by the arranged loans thanks to JP Morgan banker. While the confidence was regained in the banking community inside New York by JP Morgan, but the panic reflected the weaknesses in the U.S. financial system.

In other parts of the country, clearing houses briefly issued their own banknotes for doing business. In response, the federal government set up the National Monetary Commission to investigate options for providing currency and credit in case of any panics in the future. The result was the Federal Reserve System, which established several Federal Reserve banks to provide liquidity to banks in different parts of the country.

The Fed opened in November 1914 and the first Chairman of the Federal Reserve was an American lawyer called Charles Hamlin serving from 1914 to 1916. The current Chairman is Jerome Powell, who was nominated by the current U.S president Donald Trump On November 2, 2017.

Decision making board

The Fed is the national component of the Federal Reserve System. The Board of Directors is made up of the seven governors appointed by the President and approved by the Senate. Conservatives serve for 14 years and overlapping conditions to ensure stability and continuity over time. The President and Vice-President are appointed for a four-year term and may be reappointed in accordance with duration restrictions.

The key responsibilities of the Board of Governors are to direct monetary policy measures, analyze domestic and international economic and financial conditions and lead committees that examine current issues, such as consumer banking and e-commerce laws.

They also exercise extensive oversight of the financial services industry, manage some consumer protection regulations, and oversee the country's payments system, besides monitoring the activities of reserve banks. They set reserve requirements for depositors and approve changes in discount rates recommended by reserve banks.

The most important board's responsibility is the Federal Open Market Committee (FOMC), which manages the American nation monetary policy; the seven governors have a majority of votes on the FOMC, while the rest comes from the Chairman to complete the total of 12 votes.

The Board finances its operations by evaluating Federal Reserve banks rather than allocating them by Congress. Financial accounts are audited annually by a public accounting firm, and are subject to audit by the General Accounting Office.

How is the Federal Reserve Chairman nominated?

The Chair is nominated by the President of the United States among the members of the Board of Governors, and serves for four years after being confirmed by the U.S. Senate. The Chair may serve multiple consecutive periods, awaiting the nomination and new confirmation at the end of each period.

Impact Fed’s decisions on the economy 

The Fed's mission is to maintain financial stability throughout the stages of growth and contraction by adjusting interest rates.

With the reverse relationship between the value of money and Inflation, the Federal Reserve argues for an increase in interest rates if inflation rate increases. During economic recession, the Fed intent to cut interest rates to stimulate economic growth.

According to the Fed website, the manipulation of interest rates "leads to a series of events affecting other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money, credit and, ultimately, the scope of economic variables including in that employment, production and prices of goods and services."

As history is the best reference for everything, as the early years before the creation of the Federal Reserve showed the dual effects of uncertainty and panic caused by difficult financial crises can lead to periods of economic chaos. Due to the most of the stabilization effects of the Federal Reserve Act, those unstable periods have become less common as the U.S. economy experienced periods of fast economic expansion in the previous century.

What to expect from the Fed on Wednesday?

Monday's energy price hike helped add to the feeling that the Fed may suddenly not be in a hurry to keep cutting interest rates.

While markets continue to see the central bank cut overnight lending interest rates by a quarter of a point at this week's FOMC meeting, the situation of persistent cuts appears to have become weaker.

This came amid some changing economic trends as well as inflationary pressures caused by a 14 percent rise in oil prices at the beginning of this week. Rising inflation may prompt the Federal Reserve to rethink about cutting interest rates since it may push inflation higher towards target without any intervention.

On Monday, traders in the Federal Reserve futures market were recording a 34 percent probability that the Fed would stand pat on interest rates tomorrow, where the probability was zero a month ago and just 5.4 percent a week ago. 

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