What is the Federal Reserve?

The Fed

Think of the Federal Reserve as the gatekeeper of the US economy.

The Federal Reserve is based in Washington, D.C., the Fed (as it is known) is the bank of the U.S. government and regulates the nation’s financial institutions. It’s comprised of a network of 12 Federal Reserve Banks and a number of branches. This is all overseen by the Fed’s Board of Governors.

Besides being the nation’s central bank, the Fed studies economic trends and makes policy decisions on how to make the economy run more efficiently. Today, the Federal Reserve’s responsibilities fall into four general areas:

  • Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
  • Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.
  • Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
  • Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation’s payments systems.

The Fed is an independent agency. This means it can make decisions on its own, without needing approval from any other branch of government. However, it is subject to questions from Congress over its actions. The Federal Reserve chairman regularly testifies to both the Senate and the House.

But while the Fed has to explain itself, it is theoretically free from political pressure. One caveat on this separation of influence are the nominations of the Federal Reserve board members by the President which must be approved by the Senate.

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