The Fed

The Federal Reserve (sometimes called ‘The Fed‘) is a large central bank that loans money to other smaller banks. The presidentially appointed, Federal Reserve Board is a group of financial leaders who work for the Federal Reserve and decide how much interest to charge these banks for borrowing money. The Federal Reserve interest rate is decided by the Federal Reserve Board after studying the condition of the US Economy.

When the economy is growing too fast, the Federal Reserve makes borrowing more expensive by increasing the interest rate, which means people and companies spend less which discourages inflation. When economic growth slows, the interest rate is decreased so that borrowing will increase and there will be growth.

The Fed was created in 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907. Its duties today are to conduct the nation’s monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institutions, the U.S. government, and foreign official institutions.

The Federal Reserve is independent within government in that its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government. However, its authority is derived from the U.S. Congress and is subject to congressional oversight. Additionally, the members of the Board of Governors, including its chairman and vice-chairman, are chosen by the President and confirmed by Congress.

The U.S. Government receives all of the system’s annual profits, after a statutory dividend of 6% on member banks’ capital investment is paid, and an account surplus is maintained. The Federal Reserve transferred $78.4 billion to the U.S. Treasury in 2010.

The Federal Reserve System has faced intensified criticism following the ‘Troubled Asset Relief Program’ (TARP) of 2008–09. Some criticism involves economic data compiled by the Fed. The Fed sponsors much of the monetary economics research in the U.S., and this, some aver, makes it less likely for researchers to publish findings challenging the status quo.

Bloomberg News brought a lawsuit against the Board of Governors of the Federal Reserve System to force the Board to reveal the identities of firms for which it has provided guarantees. Bloomberg won at the trial court level, and the case is on appeal at the United States Court of Appeals for the Second Circuit.

Adherents of the Austrian School of economic theory blame the economic crisis in the late 2000s on the Federal Reserve’s policy, particularly under the leadership of Alan Greenspan, of credit expansion through historically low interest rates starting in 2001, which they claim enabled the United States housing bubble.

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