Federal Reserve System (the Fed)

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    The FedThe Federal Reserve System (also known as the Federal Reserve, or simply the Fed) is the central bank of the United States of America.

    The Fed was created in 1913 in response to a series of financial panics, designed to monitor some of the world’s most powerful financial institutions. Since its creation, its duties have expanded significantly with the Fed now dictating economic and monetary policy in the US and maintaining stability in the economic system alongside its regulatory function.

    As the world’s largest economy, decisions made in the US have a profound effect on other global economies and investors alike.

    Structure

    The Fed consists of 12 Federal Reserve Banks, which are the operating arms of the central banking system. They are organised as private corporations, primarily responsible for regulating the commercial banks within one of the 12 particular districts.

    The bank is headed up by the Board of Governors of the Federal Reserve System, comprising seven key figures, and the 12 presidents of each reserve bank. This board ensures that decisions made by the Federal Open Market Committee (FOMC) are carried out in each of the separate districts.

    As private corporations, the banks do not require public funding and instead derive funding through a combination of providing services to banks (including research and consultation), gathering interest on loans and government securities, and income generated by foreign currency reserves. Excess funds generated are directed back to the US Treasury.

    Functions and influence on the US dollar

    The Fed is tasked with “promot[ing] sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates”.1 In simple terms, this means that the Fed must ensure that the banking system is free from corruption and foul play and that the economy is healthy and stable.

    Unlike other central banks, the issuance of currency is not part of the Federal Reserve System – this is taken care of by the United States Department of Treasury.

    However, the Fed has all the duties and responsibilities that a central bank has regarding the US dollar, like managing the state’s currency, money supply and interest rates. Reports published by the Fed generally influence all US currency pairs, including the US dollar. As gold, silver and other commodities are mostly measured against the US dollar, these are also likely to be influenced by the reports of the Federal Reserve.

    1For further information, see the Fed website.