What Does the Federal Reserve Do? Doug Adamson of Suntrust

With the economy in the news every day, more attention is being focused on the Federal Reserve than ever before.  Have you ever wondered what the Federal Reserve does?  Let's look at some of the facts, and understand exactly what they do and how they do it.

 The Federal Reserve System is made up of twelve Federal Reserve Banks, overseen by the Board of Governors. The Board of Governors is located in Washington DC and is comprised of just seven members, who are appointed by the President and confirmed by the Senate. The full term of each member of the Board of Governors is 14 years, and the appointments are staggered such that one term expires on each even-numbered year. This system ensures that "fresh blood" will be brought to the Board every two years. When one’s term is up as a Board Governor, they cannot be reappointed. But if a member leaves the Board before their term expires, the appointee chosen to fill the remainder of the term can be reappointed for another full term. The terms for the Chairman and Vice Chairman are four years, but may be reappointed for additional four-year terms. The current Chairman, Ben Bernanke, and Vice Chairman Donald Kohn lead the Board of Governors.

  The main responsibilities of the Fed include:

1. Researching US national and regional economies.
2. Providing financial services to depository institutions, the US government and foreign central banks.
3. Supervising and regulating banking institutions to ensure the safety of the nation's financial system and protect the credit rights of consumers.
4. Conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy (i.e. hiking or cutting the Fed Funds Rate) in pursuit of maximum employment, stable prices and moderate long-term interest rates.
5. Communicating information about the economy via publications, speeches, seminars and websites.

  But the communication that typically grabs the attention of most is the statement given by Fed Chairman Ben Bernanke, following the eight formal meetings that take place about every six weeks throughout the year.  At these meetings, the Fed has the opportunity to make changes to the Federal Funds Rate.  They can also make adjustments to the Federal Funds Rate outside of these meeting, but rarely do so as not to rattle the financial markets.  An interesting side note is that in an effort to prevent sending the wrong message the Chairman sometimes works with experts trained to read the body language of big-time gamblers in Las Vegas.  Alan Greenspan was reported to be such a hoot that he was the life of the party in his social life.  Who would have guessed it from the image portrayed in his professional life?       

  Overall, the Fed's main responsibility is to keep the economy growing at a steady pace by keeping inflation stable and interest rates moderate. When inflation is low and stable, businesses and households can spend, knowing that their purchasing power can remain strong.  With moderate interest rates, businesses and consumers are more likely to invest for the future with funds borrowed today, and feel confident they can pay down debt with the rewards from their investments.