How The Fed Functions As Big Brother Pt.1

The Fed was established by the Federal Reserve Act, which was signed by President Woodrow Wilson on Dec. 23, 1913, in response to the financial panic of 1907. Before that, the United States was the only major financial power without a central bank. The Fed has broad power to act to ensure financial stability, and it is the primary lender of banks that are members of the Federal Reserve System. It acts as the lender of last resort to member institutions who have no place else to borrow.

The Chief Operations Of The Fed

The Federal Reserve performs five general functions: conducting the nation’s monetary policy, regulating banking institutions, monitoring and protecting the credit rights of consumers, maintaining the stability of the financial system, and providing financial services to the U.S. government.

Federal Funds Rate

The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis. By law, banks must maintain a reserve equal to a certain percentage of their deposits in an account at a Federal Reserve bank. Any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall. Put it more plainly this of the reserve requirements are like your monthly expenses totaled up, and anything that exceeds total expenses as money you can lend out.

Now if you were to lend out your extra money outside of your expenses to say a family member or a friend, you could set your own repayment terms or rate. If you decide to charge interest rate or 20%(which is not nice) you decide because it’s your own personal money. Now the bankstend to follow whatever The Fed sets are the rate. The interest rate the lending bank can charge is referred to as the federal funds rate, or fed funds rate. The Federal Open Market Committee(FOMC), the monetary policy-making body of the Federal Reserve System, meets eight times a year to set the federal funds rate.

The FOMC cannot force banks to charge that exact rate. Rather, the FOMC sets a target rate. The actual interest rate a lending bank will charge is determined through negotiations between the two banks.

To Be Continued…………

Jamaal W Vetose

President

Todd Capital Investments

Leave a Reply