What is the Fed?

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The United States experimented with a few different national or central banks early after its establishment as a nation but these were all allowed to run their course and then disappear. There was always natural antipathy against putting all of the nation's money into what would essentially be a "money trust" in the eyes of many.

Origins of the Federal Reserve

However, after the 1907 Wall Street panic (which was probably unfounded), there was a spark of renewed interest in Congress and among many investors and bankers to create an institution that could act as a stabilizer of the economy especially in rough times. This was especially true after a House Banking and Currency Committee met in 1912 and concluded that the dreaded "money trust" already existed, but in private hands of a few giant banks and thus out of the regulatory control of the government. Late in 1912 a proposal was sent from Congress to President Wilson that would create 20 regional federal banks. Wilson said that this banking system would need to have more of a centralized governance.

In 1913 the Federal Reserve Act presented by Congressman Carter Glass and Senator Robert L. Owen modified the original proposal to create the Federal Reserve Board and 12 regional Federal Reserve banks established in what were at that time the 12 most major areas of trade, commerce, and lending in the United States. All 12 regional banks were located in major cities.

These "district Feds" are in Boston, New York, Philadelphia, Cleveland, St. Louis, San Francisco, Richmond, Atlanta, Chicago, Minneapolis, Kansas City and Dallas.

The Fed's Responsibilities

The Federal Reserve is one of the most powerful organizations on the planet. It is charged with researching national and, now, also global markets and regulating the world's largest and wealthiest economy. The "Fed" sets forth all American monetary policy such as attempting to raise or lower interest rates on loans (which it does by directly raising or lowering the Discount Funds Rate, or the interest rate it charges on short-term loans to private banks) and attempting to control inflation, which it does by printing more money for circulation, attempting to get interest rates higher or lower, and through OMO (Open Market Operations)--which is the buying and selling of government securities by the Fed in the open market so as to expand or contract the amount of money in the whole banking system (this is known as "loosening" or "tightening" the monetary supply and it also affects consumer interest rates by affecting the Federal Funds Rate, or the interest rate that private banks charge each other to borrow money from each other in order to remain "liquid" for their customers).

Even the smallest action by the Federal Reserve can have an enormous impact on the buying and selling of stocks and bonds and the price of goods in the United States which ultimately affects mortgage refinance rates. Investors wait with baited breath when they know the Fed is meeting and the Chairman will later be speaking publicly about the results of the meeting. Before the announcement Wall Street typically trades based on intense speculation about what the Fed is going to do next.

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Mike Sweeney has 1 articles online

Mike Sweeney is the founder of LionSaves.com, a leading mortgage refinance calculator that focuses on consolidating debt and gives anonymous quotes.

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What is the Fed?

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This article was published on 2010/04/04
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