Source: Image of balanced board, bag of money, dollar bill, images by Video Scribe, License held by Jeff Carroll; Image of bank, Public Domain, http://bit.ly/1rTQnQE.
Hi, I'm Jeff. And in this lesson, we'll learn about the Federal Reserve and how it works to impact inflation and interest rates. So let's get started.
First, what is the Federal Reserve, often known as the Fed? In the United States of America, this is the governing bank which includes 12 areas within the USA. The Fed is constantly observing changes in the money supply and inflation. And it will work to keep the money supply constant and steady, hopefully resulting in inflation that is not too high and not too low. The Fed's goal is a healthy economy.
The Federal Reserve was established in 1913. It covers 12 administrative areas in the United States. The Fed has seven members on their board that are appointed by the President for overlapping terms of 14 years.
The chair of the Fed board advises on US economic policies and will often report in front of Congress on the Fed policies. The Federal Reserve is also the bank for the United States government.
It oversees the printing of money and the issuing of bonds to raise capital. It is also the bank for banks, which is how it helps control the money supply and interest rates. Historically, it helped with check clearing, but that is no longer an issue with electronic check clearing.
The Federal Reserve has two mandates-- to manage the money supply-- and through it, inflation-- and to manage interest rates. It does this through different tools. Reserve requirements, which is the amount of money banks must have to hold in cash or deposit. The more a bank has to hold, the less money is in the money supply, and vice versa.
When banks have to hold more money, then they are more restrictive with their loans to consumers and businesses. When it is harder to borrow money then, then less money will be spent in the economy, limiting the growth.
And discount rate controls. This is the actual rate at which banks can borrow money from the Fed. The higher the rate the bank has to pay, the less money the bank will lend out to the public, and the less money in supply, and vice versa.
Again, when the discount rate is higher, then banks will borrow less money from the Fed, lend out less money to consumers and businesses, and it will be harder and more expensive to borrow money.
OK, well done. In this lesson, we learned about the purpose of the Federal Reserve. We talked about its history. We discussed the role of the Fed. And we reviewed the tools the Fed uses to manage money supply and interest rates.
Thanks for your time, and have a great day.
