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Federal Reserve

Federal Reserve

Author: James Howard

This lesson is an overview of the Federal Reserve.

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Video Transcription

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Hello and welcome to this tutorial on the Federal Reserve. Now, as always during these tutorials, please feel free to fast forward, pause, or rewind as many times as you need in order to get the most out of the time that you'll spend here. So let me ask you a question. What exactly is the Fed? I know we've heard it on the news, and we hear it talked about every once in awhile. But who are there? What is it? What does it do? Well, during this tutorial, what we're going to be looking at is the purpose of the Fed. We're also going to looking at the history of the Federal Reserve. We'll be looking at the role of the Fed, and finally, the tools that the Fed has at its disposal. The key terms for this lesson are the Federal Reserve.

So let's go ahead and define the Federal Reserve. In the United States of America, this is the governing bank, which includes 12 areas within the USA. Now the purpose of the Fed is to observe changes in the money supply within the country. It also takes a look at inflation and works to keep the money supply constant and steady-- not too high and not too low. The goal is to keep inflation kind of at a manageable pace. And the ultimate goal here is to make sure that the economy of the United States remains healthy.

Now the Fed was formed in 1913, and it covers 12 administrative areas within the United States. There are seven members on the board, and they're appointed by the President. And they serve in overlapping 14 year terms. And these are the people who make up the Federal Reserve Bank. And it's commonly referred to as the Fed.

Now, the chair of the Fed, or the Chairman of the Federal Reserve, advises the United States on economic policies. So the role of the Fed is-- well basically, it's the bank for the government. It's the US government's bank. And it oversees the printing of money and issuing of bonds to help raise capital for the government. It also serves as the bank for banks in the United States, where they can borrow money to help stay within the rules and comply with the guidelines that the Federal Reserve puts down.

Now historically, it also helped with checked clearing. But because of electronic check clearing now, that no longer really is an issue for the Fed. So they don't really take care of that much anymore.

Now, the tools that the Fed has at its disposal in order to keep the US economy healthy is one, it sets down reserve requirements. And this is the amount of money that banks must hold in cash or deposits. The more a bank has to hold, the less money is in the supply that is in the United States. Also, vice versa. The less money that they have to hold, the more money is out for circulation and available for use by the general public.

So what this boils down to is if a bank has a really high reserve requirement, then they have to hold more money within their own bank. Which means that if I try to borrow money to buy a car, or a business tries to borrow money to take care of a business expense, there's less of it out there that the business or I am able to access. And what this does is it drives up interest rates and also raises the value of money.

Remember we talked about money and what it is. We know that the less that's out there, the less supply there is in the general environment, the more valuable that money's going to be. So it's going to be more expensive to do things. They also said discount rates controls and this is the rate which banks will borrow money from the Fed.

The higher the rate a bank has to pay, the less money the bank will tend to lend out. And the less money, again, that's going to be in the supply chain for general use. Also, vice versa-- the lower the rate the bank has to pay, then the more money they'll be able or willing to lend out in the form of loans, and more money will be available. Again, this is going to affect you and I as businesses, because a higher rate is going to mean that banks will have less money to lend out. And they'll also be less willing to lend that money. And so it'll be harder to borrow money, and it'll be more expensive.

So what is it we looked at today? Well, we talked about the purpose of the Fed. We also looked at the history of the Fed, or the Federal Reserve. We looked at the role that the Fed plays in the US economy and managing the economy to make sure it stays healthy. And lastly, we looked at the tools that the Fed uses in order to make this happen-- the discount rate controls they have, and also setting those reserve requirements.

As always, I want to thank you for spending some time with me today. And you folks have a great day.

Terms to Know
Federal Reserve

In the United States of America, this is the governing bank; which includes 12 areas within the USA.