What is the Federal Reserve

What is the Federal Reserve

Many times, you will hear about the Federal Reserve System (the Fed) meeting but what exactly is it they do. The Fed is the central bank of the U.S. and provides a stable monetary and financial system. It controls the federal funds rate which is the rate banks can borrow from the Federal Reserve and serves as the basis for all other interest rates in the economy.

The Fed has seven members and 12 Federal Reserve banks. They regulate monetary policy along with supervising and regulating banks. Quite simply they manage the country’s money supply.

By raising or lowering the federal funds target rate the Fed can slow down or stimulate the economy depending on how the overall economy is trending.

The Fed is an independent body because its decisions should not be influenced by the President or any other government official. It still has congressional oversight.

The Fed sets rate with an implied target rate of inflation of 2%. If inflation is higher than 2% then the Fed will have some inclination to raise interest rates and slow the economy which should pull down inflation.

This is a very powerful and influential body because what they do will determine what interest rates are for homes, cars and credit cards.

The Fed normally meets 8 times per year and can meet more frequently if needed.