Federal Reserve and Interest Rates

Although the Federal Reserve is the central banking system within the U.S., but what some may not know is that it is not owned by the United States government, but is an independent entity that operates under the Federal Reserve Act of 1913. It was the Federal Reserve Act that created it and many individual banks make up the Federal Reserve, but it is the Board of Governors that is responsible for many of the decisions that are made.

There are twelve privately-owned Federal Reserve banks that are located in 12 major cities that are a part of 12 districts. Each has its own board of directors and governs activity within their district.

From there, there are individual member banks that own stock in the privately-owned Reserve banks. This is a very unique structure because there are no other central banks within countries anywhere around the world that operate in this way. It is also unusual that an entity not owned by the government would be responsible for the creation of its currency. The privately-owned Federal Reserve banks are responsible for currency creation and other money supply measures, which is why when you look at paper money you will see where the bill was made.

Responsibilities

There are a number of goals and responsibilities that the Federal Reserve is responsible for. For instance, a goal is to make sure employment rates stay up. If the unemployment rates start going up, then the Reserve must do what needs to be done to influence the economy in a way that the trend reverses and individuals start getting their jobs back.

Inflation must also be kept stable and this is something else that the Federal Reserve works to control. It is important that inflation is kept under control because it can have an influence on employment rates because people will not buy as much if the cost of their necessities goes up.

Banking institutions are also regulated so that the entire banking system is kept honest and sound. If there is an issue with a bank, then the Federal Reserve steps in. And if a bank experiences a foreclosure, it is the responsibility of the Federal Reserve to withhold some of that bank's lending power to try and offset the cost of that foreclosure on the economy. This is a necessary evil and one of the reasons why the reins on mortgage lending have been tightened. Many banks that experienced excessive foreclosures had some of their lending privileges taken away or reduced in order to keep more bad loans from going out because the economy couldn't afford any more decline. This, however, is a rule that is automatically enacted despite the state of the economy in order to prevent disorder.

The Purpose

The main reason why the Federal Reserve was put in place was to address the panic that was occurring within banks. What's interesting is that at one time individual cities would have their own currencies rather than a universal currency throughout the U.S. Luckily, having a central bank turned this around because different currencies made it difficult to do business outside of certain communities unless the currency was converted.

So all-in-all, the Federal Reserve maintains balance. The moment that something starts to go out of balance, the Federal Reserve fixes it. Although the fix may not always be instant, the fix can have a domino effect. One thing is repaired after another. The Federal Reserve just has to put everything in motion. Just imagine what banks, inflation, currency production, and various other aspects of the financial part of the U.S. would be like without the Federal Reserve.

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