LearnVestonomics: What Is The Federal Banking System?

LearnVestonomics: What Is The Federal Banking System?

Tomorrow, the U.S. Federal Reserve will have a meeting; big decisions are most likely in the works for November or December, namely whether the Fed will buy hundreds of billions of dollars in bonds as a way to strengthen the economy. Right now is a scary and exciting time for the Fed because three of its seats are waiting to be filled by President Obama’s nominees. Although the Fed usually has seven governors, it has been operating with only four since former Vice Chairman Donald Kohn retired at the beginning of September. Here’s exactly how the Fed functions and why you should care:

1. President Obama’s Appointments Will Have Big Implications For The Economy
The seven people on the board of the Fed are so important because the Federal Reserve’s job is to help keep prices stable, interest rates low, and the economy functioning. It does this by acting as the bank of choice for the federal government and by helping to regulate the banks that provide services to the American public. It does everything from distributing newly-printed cash to interacting with foreign central banks. So, as the Fed tries to decide whether to back off or to intervene further in the economy, Obama can use these new appointees as a significant opportunity to influence economic policy.


2. The Fed Both Stimulates The Economy And Curbs Inflation

It does this by raising and lowering interest rates, and those changes are then passed on to consumers. Lower interest means that people are more likely to borrow money to buy things like cars and new homes—which stimulates the economy. Higher interest rates mean the opposite, that people will put more in their piggy banks—which can help curb inflation.

3. The Fed Is Accountable To Congress, But It’s Meant To Be Non-Political
Chairman Ben Bernanke, for instance, has been the chairman under Presidents George W. Bush and Barack Obama.

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