The Fed: Here's the 411

Headlines are abuzz about the president’s pressure on the Fed to raise interest rates.

That’s not as dull as it sounds.

Putting aside the politics of election timing and whether a president has such authority, what is the Federal Reserve Bank, and why should we care?

Because it’s the Fed’s job to seriously impact the economy. And that affects everyone.

The Federal Reserve System, a.k.a. “the Fed,” is the nation’s central bank. Created by Congress in 1913 in response to the financial panic of 1907, it was designed to give the nation a safer, more flexible and more stable monetary and financial system. That wasn’t reinventing the wheel; back then ours was the only major financial power in the world without one.

How does the Fed keep money relatively stable?

It regulates and lends money to banks to keep them going (as a last resort). And it sets the interest rates banks pay when they borrow (and pass on to us, thus affecting the economy) — that’s the rate in the headlines.

The Federal Reserve’s responsibilities cover four general areas:

Setting national monetary policy, via credit conditions that trickle down, influencing the economy, employment, and prices. That’s done by a committee which manages the nation’s money supply (lower rates mean more cash flowing; higher rates, less cash). The committee meets at least eight times a year, comprised of the Fed’s governors plus five presidents of the 12 regional Federal Reserve Banks — located in major cities across the U.S. (in our region, San Francisco).

Supervising and regulating banks to ensure our banking system is safe and sound. They use regulations, rating systems, bank examiners, disclosures and penalties to achieve this.

Maintaining financial stability and containing systemic risk in financial markets, using their day-to-day supervision and monetary policy-setting.

Lending to the government. The Federal Reserve and Department of the Treasury work together to borrow money when the government needs cash. The Fed issues and auctions Treasury securities on the government’s behalf and helps operate and oversee the nation’s payments systems.

Why do we need a Federal Reserve Bank?

Before we had one, there were literally thousands of currencies in the U.S., and their values were all over the place. Banking wasn’t safe; account holders’ money may or may not have been there to withdraw. We needed money rules and stability.

Now that we have one, why should we working stiffs pay any attention?

Simple: Done right, getting a job, a car or home loan, and most other financial aspects of everyday life are so much easier. If things aren’t going well with the Fed — the way it’s run, the way it deals with the country’s economic problems (and political pressures) — then all those things can get harder for us.

To learn more, see Federalreserve.gov.

And today’s weird word: Orotund – pompous or bombastic.

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Sholeh Patrick is a columnist for the Hagadone News Network. Contact her at [email protected].