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The Fed - one of the most influential institutions in the world

The Fed - one of the most influential institutions in the world

created Natalia Bojko14 March 2019

The FED, or Federal Reserve System, is America's central bank. The Federal Reserve was created to stop the financial panic in the United States when it became clear that there was a great need for an authority to centrally manage the US monetary system. It has a huge impact on the world economy. Its decisions, conferences and meetings are followed with great attention not only by institutional investors. It is one of the most influential institutions on the market. In this article, we'll take a closer look at it.

Check it out: Investor's Dictionary

A brief history of the FED

Before the FED was formed in the USA, there was no official institution responsible for supervising monetary policy, which is currently exercised by the central bank. At the turn of the 1791th and 1811th centuries, two bodies were formed, providing a kind of foundation for the current FED. These are the First Bank of the United States, which operated from 1816 to 1836, and the Second Bank of the United States, operating from XNUMX to XNUMX. The lack of a regulator to supervise banks and the market led to the era of free banking in the United States complete mess and panic. In order to understand and visualize its scope, it is worth mentioning that more than half of the banks went bankrupt during this period. On the other hand, the average period of operation of these institutions was about five years. To prevent further chaos, formal supervision of the banks was introduced through the creation of the Office of the Comptroller of the Currency, which is still in place today.

jerome powell

Jerome Powell, current head of the FED

Ultimately, the bank run at the beginning of the 1912th century was averted mainly on the initiative of Senator Nalson Aldrich. He organized a seemingly ordinary meeting that was a secret conference. At the Jekyll Island Club, Abraham Andrew (deputy secretary of the US Treasury), Paul Warburg (Kuhn, Loeb & Co.), Hanry P. Davison and Benjamin Strong (representatives of JP Morgan & Company), Frank A. Vanderlip (representatives of JP Morgan & Company), National City Bank of New York). Thanks to them, a bill was drafted, which was to create the first central bank. A certain difficulty in pushing the bill further and passing it through was the loss of the senator's party in the elections. The project was finally approved under Woodrow Wilson in XNUMX, who also saw the need for new regulations.

The first chairman of the FED was Charles Hamlin (10 August 1914 - 10 August 1916. Currently, this office is held by Jerome Powell.

Bank goals

Initially, the bank's goals were to increase employment, maintain price stability and control long-term interest rates. However, over time, the Fed acquired new powers. Thanks to them, he took over new responsibilities that were closely related to the supervision and regulation of banks. All this was to keep the US banking system stable. The central bank also became an entity that provided financial services to depository institutions and the United States government, among others. In addition to the above issues, it participates in the process of controlling the amount of issued cash and putting cash into circulation. What is also important for traders, the US central bank is also responsible for setting interest rates.

Authorities and organization

The structure of the federal reserve is made up of 2 authorities. Speech of the Board of Governors based in Washington and 12 of the SRF (Federal Reserve Banks) banks located in the United States and their branches, which are located, inter alia, in Boston, Philadelphia, New York, Cleveland, Atlanta, Richmond, St.Louis, Chicago , Minneapolis, Kansas City, Dallas and San Francisco.

The Board of Governors performs a function similar to that of the Management Board of the NBP. It consists of 7 members elected for a fourteen-year term. The chairman and two vice-chairmen, one of whom replaces the chairman in his absence, and the other responsible for the development of the supervisory policy and regulatory activities of the central bank, are appointed for a period of 4 years in office and elected from among the Board of Governors. All members must be confirmed with the consent of the Senate meeting.

FOMCIn addition to that, as we mentioned, there are 12 more Fed banks. They are responsible for a certain part of the country. Each of them meets the policy of the central bank in its area. In addition, each such unit has its own decision-making body, which consists of a 9-member Board of Directors. These representatives are elected by 3 influential groups: the bank's shareholders, people from the world of industry and commerce, representing at the same time the inhabitants of a given area, and the same group from which representatives are elected by the council itself.

An important element of the FED is the Federal Open Market Operations Committee (FOMC). During the FOMC meetings, decisions are made mainly on the discount rate and the amount of required reserves, to which banks must comply. Moreover, this committee plays a key role in shaping monetary policy and overseeing open market operations. One of the main tasks is also setting the target levels of the money supply.

The FED is the most important institution shaping the monetary policy in the USA. Hence, also (as on the shoulders of the majority of central banks) there is also a responsible regulatory role.

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About the Author
Natalia Bojko
Graduate of the Faculty of Economics and Finance, University of Białystok. He has been actively trading on the currency and stock markets since 2016. It assumes that the simplest analyzes bring the best results. Supporter of swing trading. When selecting companies for the portfolio, he is guided by the idea of ​​investing in value. Since 2019, he has held the title of financial analyst. Currently, he is the co-CEO & Founder in the Czech proptrading company SpiceProp. Co-creator of the Podlasie Stock Exchange Academy project (XNUMXrd and XNUMXth edition).