The Federal Reserve? Huh?

For those of you who still may be a little confused about what exactly the Federal Reserve is, this article is intended to clear up any misconceptions you may garner and hopefully move you towards a better understanding of Fed policy.

            The Federal Reserve is the central bank of the United States. Congress created the Fed in 1913 under Woodrow Wilson to provide a safer, more flexible and more stable monetary and financial system that had been under attack in years prior due to perceived market inefficiencies.

Currently, as described on the Fed’s very own website, the Federal Reserve has four stated goals. These include:

·       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.

Essentially the Fed has three tools to work with when dealing with monetary policy. The Fed can manipulate short-term interest rates, set the discount rate, and buy/sell Treasury Bonds. These tools ultimately affect the total amount of money in circulation, and as a result, inflation is often a very real side effect of Fed intervention in economic and monetary policy.

Inflation is the leading topic of discussion in mainstream politics with respect to the Federal Reserve’s involvement in the global economy. Critics often pose the idea that the free-market would do a much better job at regulating the economy and efficiently allocating its scarce resources.

Politicians such as Republican presidential contender, Ron Paul, have called for stronger regulation and transparency when dealing with the Federal Reserve. Paul argues that the Fed makes decisions that often serve special interests with cheap loans and easy credit, rather than the American people for whom it was designed to serve.