The Fed's mandate is "to promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates."
In other words, the Fed's job is to foster a sound banking system and a healthy economy. To accomplish its mission, the Fed serves as the banker's bank, the government's bank, the regulator of financial institutions and as the nation's money manager.
Each of the 12 Fed Banks provide services to financial institutions in the same way that regular banks provide services to individuals. This helps to assure the safety and efficiency of the nation's payments system. For example, when you cash a check or have money electronically transferred, there is a good chance that a Fed Bank will handle the transfer of money from one bank to another.
The Government's Bank
The biggest customer of the Federal Reserve is one of the largest spenders in the world - the U.S. government. Similar to how you have a checking account at your local bank, the U.S. Treasury has a checking account with the Federal Reserve. All revenue generated by taxes and all outgoing government payments are handled through this account. Included in this service, the Fed sells and redeems government securities such as savings bonds and Treasury bills, notes and bonds.
The Fed also issues all coin and paper currency. The U.S. Treasury actually produces the cash, but the Fed Banks distributes it to financial institutions. It's also the Fed's responsibility to check bills for wear and tear and to take damaged currency out of circulation.
Regulator and Supervisor
The Federal Reserve Board has regulatory and supervisory responsibilities over banks. This includes monitoring banks that are members of the system, the international banking facilities in the U.S., the foreign activities of member banks and the U.S. activities of foreign-owned banks. The Fed also helps to ensure that banks act in the public's interest by helping to develop federal laws governing consumer credit. Examples are the Truth in Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Truth in Savings Act. In short, the Federal Reserve Board acts as the policeman for banking activities within the U.S. and abroad.
The FRB also sets margin requirements for investors. This limits the amount of money that an investor can borrow to purchase securities. Currently, the requirement is set at 50%, meaning that with $500, you have the opportunity to purchase up to $1000 worth of securities.
While all the previously mentioned duties are important, the primary responsibility of the Fed is devising and implementing monetary policy. This function is so important, in fact, that we'll talk about it in detail in the next section.
The Federal Reserve: Monetary Policy
TradingThe Federal Reserve System is the central bank of the United States. It regulates monetary policy and supervises the nation’s banking system.
InsightsThere are many fallacies about the Fed. The following misconceptions are among the most popular.
TaxesAssets on the Fed's balance sheet, money supply level, national debt level and economic production should be maintained in equilibrium.
Personal FinanceA central bank oversees a nation’s monetary system.
InvestingDiscover the steps that the Federal Reserve has taken to help save the economy.
Personal FinanceThe federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements.