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Overview of the Federal Reserve
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The more money in circulation,
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Overview of the Federal Reserve
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Hi, I'm Jim Flink with About.com, and we're explaining the Federal Reserve, the central banking system of the United States.The Federal Reserve, or Fed, is a government organization set up to promote a stable banking system and a growing economy. It's made up of 12 regional Federal Reserve Banks, private banking partners, and a Board of Governors. Together, they decide the monetary policy of the United States.
The Fed has many duties, like distributing paper money and coins to banks, processing checks and money transfers, and controlling the money supply. It also serves as the banker for the U.S. government, as well as for other banks.But the Fed's most important jobs are in what's called the “Dual Mandate” — to combat inflation and unemployment. To do that, the Fed has three main tools: It can change the discount rate - that's the rate the Fed charges other banks when they borrow money from it. It can change the Federal funds rate — the rate banks charge each other for overnights loans.
And if more drastic measures are needed, the Fed can engage in open market operations, buying and selling U.S. securities. All of these tools can be used to temporarily raise or lower interest rates. For instance, if the Fed wanted to lower interest rates, it could lower the Federal funds rate and the discount rate, putting more money into circulation. The more money in circulation, the lower the interest rate.
After the collapse of the housing market bubble in 2006 and 2007, the Fed cut the Federal funds and discount rates to practically zero in order to keep banks lending and money circulating. That's an example of how the Fed responds to a crisis. When the U.S. economy has a problem, the Fed tries to counter the it.The group that makes those decisions is called the Federal Open Market Committee. The Committee has 12 members: the seven Federal Reserve Board governors and 5 of the presidents of regional banks. The FOMC meets every four to eight weeks to decide on monetary policy.
The board of governors are appointed by the president and confirmed by Congress for 14-year terms. The chairman and vice-chairman are appointed the same way, but for 4-year terms. The current chairman is Ben Bernanke, a former Princeton economist appointed by president George W. Bush in 2006.
And that's an overview of the Federal Reserve. Thanks for watching. For more information, be sure to check out About.com.
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