The Federal Reserve: Duties
  1. The Federal Reserve: Introduction
  2. The Federal Reserve: What Is The Fed?
  3. The Federal Reserve: Duties
  4. The Federal Reserve: Monetary Policy
  5. The Federal Reserve: The FOMC Rate Meeting
  6. The Federal Reserve: Conclusion

The Federal Reserve: Duties

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.

Banker's Bank

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.

Money Manager
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

  1. The Federal Reserve: Introduction
  2. The Federal Reserve: What Is The Fed?
  3. The Federal Reserve: Duties
  4. The Federal Reserve: Monetary Policy
  5. The Federal Reserve: The FOMC Rate Meeting
  6. The Federal Reserve: Conclusion
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    Commercial banks borrow from the Federal Reserve primarily to meet reserve requirements when their cash on hand is low before ... Read Full Answer >>
  2. Which nations' economies have reserve ratios?

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  3. Why would the Federal Reserve change the reserve ratio?

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  4. Who are some real life examples of "doves" in the finance world?

    Real-life examples of "doves" in the finance world include Janet Yellen, Paul Krugman, Ben Bernanke, Bill Dudley, Narayana ... Read Full Answer >>
  5. Are so-called self-offering and self-management covered by "Financial Instruments ...

    As the Financial Services Agency (FSA) explains, self-offering of interests in collective investment schemes falls under ... Read Full Answer >>
  6. How does lower borrowing costs affect new airlines in the aerospace industry?

    Lower borrowing costs can help a new airline afford to obtain aircraft as well as pay for operating expenses such as salaries ... Read Full Answer >>
  7. How does the law of supply and demand affect monetary policy in the United States?

    The law of supply and demand affects monetary policy in the United States through the adjustment of interest rates. Interest ... Read Full Answer >>
  8. How does inflation affect a company's short-term investments?

    Inflation marginally erodes a company's short-term investments. Short-term investments are typically ultra-safe liquid assets, ... Read Full Answer >>
  9. What impact does the Federal Reserve have on a bank's profitability?

    The Federal Reserve impacts a bank's profitability with its influence on interest rates and the money supply. The discount ... Read Full Answer >>
  10. Why is purchasing stocks on margin considered more risky than traditional investing?

    Buying on margin involves borrowing money from a broker to purchase stock. A margin account increases your purchasing power ... Read Full Answer >>
  11. Why do supply shocks occur and who do they negatively affect the most?

    The exact nature and cause of supply shocks is imperfectly understood. The most common explanation is that an unexpected ... Read Full Answer >>
  12. Why are treasury bond yields important to investors of other securities?

    The yields on U.S. Treasury instruments, notably 10-year Treasury bonds, are considered to be an important measuring stick ... Read Full Answer >>
  13. How do interest rate changes affect the profitability of the banking sector?

    The banking sector's profitability increases with interest rate hikes. Institutions in the banking sector such as retail ... Read Full Answer >>
  14. What is the history of the S&P 500?

    The S&P 500 was introduced by Standard & Poor's in 1957 as a market index to track the value of 500 large corporations ... Read Full Answer >>
  15. What is the difference between holdover float and transportation float?

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  16. What are some different kinds of expansionary policy?

    Expansionary policy is a macroeconomics strategy that seeks to stimulate the economy by expanding the money supply. When ... Read Full Answer >>
  17. What are the implications of a high Federal Funds Rate?

    A high federal funds rate discourages banks from borrowing from one another, which tightens the money supply. Raising the ... Read Full Answer >>
  18. What is the difference between Keynesian economics and monetarist economics?

    Monetarist economics is Milton Friedman's direct criticism of Keynesian economics theory. Simply put, the difference between ... Read Full Answer >>
  19. Why are bond yields calculated in terms of basis points?

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