Money Basics: What is the Fed?

Welcome to Money Basics, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important terms involving your money.

The Federal Reserve, often just called the Fed, is the central banking system of the United States. The Federal Reserve was established by Congress in 1913 under the Federal Reserve Act and signed into law by President Woodrow Wilson. The Fed was established in order to provide a stable monetary and financial system for the country.

The Fed is an independent government agency run by the Board of Governors of the Federal Reserve. It is headed by a chairman and vice chairman and consists of seven presidential appointees who are confirmed by Congress and serve 14-year terms. The Fed chair is appointed by the US president and approved by the Senate for a four-year term. There are 12 Federal Reserve districts and banks with 24 branches throughout the country.

Though Fed members are appointed by the US president and must be approved by the Senate, the agency is independent and its decisions and actions don’t require approval.

The Fed is in charge of supervising and regulating financial institutions. It also studies economic trends and makes monetary policy decisions in order to provide stability and mitigate shock to the economy from any unexpected events. The Fed’s monetary policy, or regulation of interest rates and money availability, seeks to encourage economic growth and employment as well and prevent high rates of inflation or deflation.

If the economy is struggling, the Fed can supply money to banking institutions by lending at lower interest rates. With lower interest rates, the borrowed money from the Fed makes it cheaper for banking institutions to lend to other banks and businesses with the hope of encouraging spending and spurring economic growth. If the economy is growing too rapidly and needs to slow down because of inflation fears, the Fed can increase interest rates and tighten the supply of money. The Fed’s actions can impact more than just bank lending. Changes in Fed policy can also affect mortgages and credit card payments.

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