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  • The Federal Reserve, or the Fed,

  • is the central bank of the United States.

  • So what's the difference between the Fed

  • and a commercial bank like this one?

  • Let's say I use a bank to deposit

  • and withdraw cash or to take out a loan.

  • When I deposit money at a bank,

  • the bank doesn't just hold on to my cash,

  • it lends it out to other customers.

  • The bank serves as an important

  • middleman in the economy.

  • But if everyone tries to take out

  • money at the same time,

  • a bank might not have enough cash on hand.

  • That's when a central bank could step in

  • to lend extra cash

  • so the bank can stay open.

  • The U.S. Congress created the Fed

  • in 1913 after a series of financial panics

  • to stabilize and supervise

  • the country's banking system.

  • The Federal Reserve Act

  • established the Fed as a bank to other banks,

  • where it cleared checks and provided currency.

  • Congress also tasked the Fed

  • with what would become

  • its most important job,

  • conducting monetary policy.

  • Monetary policy is how the Fed

  • changes interest rates,

  • basically the amount you, the borrower,

  • can be charged for borrowing money.

  • Fed interest rates can affect anything

  • from how much you pay for

  • a car loan or a home mortgage.

  • The Fed funds target rate

  • determines how much banks pay

  • to lend to each other,

  • which in turn affects

  • the amount of money businesses

  • and consumers have to spend.

  • When the Fed sets its target rate

  • it has two key goals in mind

  • stable prices and maximum employment.

  • The Fed wants prices to stay stable

  • so you can plan your current and future budgets.

  • Think of Germany where the

  • price for a loaf of bread

  • increased from one mark in 1918

  • to 200 billion marks five years later.

  • The Fed also has to keep

  • a close eye on employment.

  • If unemployment is high,

  • the Fed lowers interest rates to

  • encourage businesses and consumers

  • to borrow and spend their money

  • instead of saving it.

  • That's what the Fed did

  • during the financial crisis.

  • When the unemployment rate spiked

  • in 2008, the Fed lowered its key rate to zero.

  • It also took unprecedented steps

  • to lower rates by buying assets

  • like government bonds

  • from financial institutions.

  • This pumped money into the economy

  • to encourage banks to lend.

  • The Fed's policies have

  • helped the jobs market recover

  • but not everyone is happy,

  • especially savers who have

  • basically made no interest on

  • their money in the bank

  • for the past 10 years.

  • Some have even called to

  • abolish the Fed altogether.

  • Some politicians

  • have called the Fed political

  • for keeping interest rates so low.

  • But even though the Fed is

  • ultimately held accountable by Congress,

  • it operates as an independent entity.

  • The Fed is made up of the Board of Governors

  • which includes seven members called Governors

  • including the Fed Chair and Vice Chair.

  • Fed Governors are appointed by the President

  • and approved by the Senate.

  • The Fed also includes 12 regional reserve banks

  • in cities across the country.

  • Each regional bank has its own Fed President.

  • Governors and rotating Fed Presidents

  • meet eight times a year in Washington

  • and they vote on where to set rates.

  • Other central banks around the world

  • and traders keep a very close eye

  • on Fed decisions.

  • That's because the smallest

  • change in Fed policy can ripple

  • throughout stock markets

  • ultimately down to your own pocketbook.

The Federal Reserve, or the Fed,

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