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What Does the Federal Reserve Do?

By    |   Tuesday, 14 July 2015 04:14 PM

The Federal Reserve Bank holds an important role in the stability of the U.S. economy. While most understand the importance of a dollar in their wallet, many have no idea how central the Fed is to keeping their financial world afloat.

When President Woodrow Wilson signed the Federal Reserve Act in 1913, the country had been through a series of financial crises. Though the Great Depression of the 1930s and the more recent Great Recession were not yet envisioned, the citizens had suffered through several failed attempts at centralized banking and the country had been through a period before the Civil War that included a “free banking era” where banks issued their own notes. There were also several panics and depressions in the late 1800s and early 1900s.

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From the beginning, one of the main purposes of the Federal Reserve was to stabilize the economy. The country had been forced to rely on wealthy citizens to bail out the government during past financial crises and leaderswanted to ensure that was no longer going to be a problem. The Aldrich-Vreeland Act of 1908 allows the government to issue emergency currency if necessary to stabilize economic problems. The commission formed by this Act met to lay out the plans for what would become the Federal Reserve Banking system.

There are three main directives laid out for the organization by the Federal Reserve Act. The Federal Reserve System:

1. Conducts monetary policy for the country. This includes making money and setting interest rates.
2. Regulates banking institutions. This includes interpreting and putting into practice new laws that concern finance.
3. Provides payment services to banks. This duty breaks down to providing cash as needed — particularly for banks in emergency situations.

For the purposes of the Fed, the country is broken up into 12 regions with each region having a Federal Reserve Bank. Those banks and the Board of Governors, based in Washington, D.C., make up the centralized bank, and together they serve as the banker for the U.S. government.

While each Fed bank has the same general responsibilities, some have extra roles. The New York Fed conducts open market operations, works with foreign exchange markets, and stores gold. "Open market operations" are defined by Investopedia as “the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system.” When the Fed buys bonds, money is injected into the economy and banks can loan that money to consumers. When the Fed sells, there is less money in the economy. The process helps stabilize inflation.

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The Federal Reserve Bank holds an important role in the stability of the U.S. economy. While most understand the importance of a dollar in their wallet, many have no idea how central the Fed is to keeping their financial world afloat.
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2015-14-14
Tuesday, 14 July 2015 04:14 PM
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