Think of the central bank as the Grand Poobah of a country’s monetary system. In the U.S. that honor is bestowed upon the Federal Reserve. While there are other important central banks, like the European Central Bank, the Bank of England and the People’s Bank of China. For now, focus stateside.
The Federal Reserve was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. To keep it simple, think of the Fed as having responsibility in these four areas:
- conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices;
- supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers;
- maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
- providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation’s payments systems.
You need look no further than the Federal Reserve FAQs to learn more about how it is structured.
The Federal Reserve may not take your money, but be clear it has much financial impact on your life. Brooklyn Law Professor David Reiss gives one example, “The Federal Reserve can have an impact on the interest rate you pay on your mortgage. Since the financial crisis, the Fed has fostered accommodative financial conditions which kept interest rates low. It has done this a number of ways, including through its monetary policy actions. The Federal Reserve’s Open Market Committee sets targets for the federal funds rate. The federal funds rate, in turn, influences interest rates for purchases, refinances and home equity loans.”