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Fed Reserve Basics: What is the Federal Reserve?

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fedThe question ‘What is the Federal Reserve?’ has been asked countless times by countless news watchers and home owners that are trying to understand how the FED affects mortgage rates and finance in general.  Known as the Fed, this body is the independent central bank of the United States. So why all the uncertainty? Most people are aware of it, but a large number have little understanding of what it does. Here are some Fed Reserve basics to help resolve that.

What is the Federal Reserve?

Signed by Woodrow Wilson in December, 1913, the Federal Reserve Act brought the ‘Fed’ into being in order to create a more stable financial system in the country whose decisions are independent of Congress. It was originally intended to ensure sufficient availability of cash to banks should there be a run.

It supervises banks and regulates them to maintain the credibility and soundness of the financial and banking systems of the USA, to offer protection to the credit rights of the American consumer and to provide certain financial services to the government of the USA and certain inland and foreign financial institutions.

Although independent of Congress, the Central Bank is accountable and must provide an annual report to Congress on the state of the economy.

Structure of the Federal Reserve System

The Fed consists of a Board of Governors based in Washington, consisting of seven members appointed by the President of the USA, but confirmed by senate.  Each serves for 14 years although members appointed to the Chair and Vice Chair (by the President) serve in those capacities for only four year terms which are renewable.

There are 12 regional Reserve banks situated in major cities across the USA, each of which is supervised by the Board. These banks are responsible for generating their own income which is used for research and analysis of the economy, any surplus of income going to the U.S. Treasury.

The Federal Open Market Committee (FOMC) is a Federal Reserve committee responsible for overseeing the country’s Open Market operations. That is the buying and selling of treasury securities, a form of government debt.

What Does the Fed Do?

The Federal Reserve Bank is designed to ensure that the American economy runs as smoothly as possible and to help avoid inflation. One of its objectives is to reduce unemployment, and help maintain a stable economy with lengthening boom and bust cycles. These will never be eradicated, but by helping to maintain longer periods between them, the Fed can help to minimize their effect on business, interest rates and mortgage rates.

Through the FOMC, the Fed makes decisions regarding the money supply in the USA and interest rates. Since interest rates affect mortgage rates, the Federal Reserve is in a large way responsible for the amount you have to repay on your mortgage loan.

So what is the Federal Reserve? The Fed has a significant say in the money supply, interest rates and through these, the rise and fall of real estate prices. It is useful to be aware of how it works so you might get some understand how the rising cost of borrowing fluctuates – and along with this your mortgage rates.

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Trace Richardson has written 638 articles on BankChirp.com

I'm Trace Richardson and am the founder of LeadPress. I’m a licensed California Real Estate broker and a former equities trader previously holding the Series 7, 63, 55 and 24 securities licenses.

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