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The Federal Reserve Directs the Economy: How Do They Decide on Policy?

The Federal Reserve of the United States government is one of the most important financial institutions in the world. It’s the central economic institute for the US and determines much of the country’s economic policy. If you’re wondering how, exactly, the Fed decides on that policy, then you’re in the right place.

Today we’ll take a closer look at the central bank and explain how and why they direct the economy and help act as the arbiters of financial planning for the entire country.

Economic Policy

The Federal Reserve was created by Congress in 1913 and has three main goals. It’s meant to oversee employment rates, manage interest rates for loans, and help to maintain steady prices in the market. The board of governors that directs the Fed is appointed by the president. The board of governors is made up of seven members. Meanwhile, the twelve regional Federal Reserve Banks handle the oversight of banks across the country. Banks in the US are bound by law to hold stock in the Federal Reserve Bank of their region.

The Federal Open Market Committee is the body responsible for the majority of economic policy enacted by the Fed. The FOMC is comprised of the board of governors and the president of each of the regional Federal Reserve Banks.

The Federal Reserve itself doesn’t receive funding from the US government and is instead funded by the profits of the Federal Reserve Banks. Decisions made by the Fed don’t need to be overseen by Congress, the president, or any other government agency. In a sense, the Fed is an independent institution that works for the government.

Relationship to the Treasury

The Federal Reserve is unusual in that it is one of the few central banks in the world that doesn’t print its own currency. The United States Treasury is responsible for issuing currency, a responsibility given to the Treasury in the Constitution.

The Treasury has a checking account with the Federal Reserve, which acts as the main account through which the government pays its bills. The Treasury, in turn, creates the physical bills and coins that comprise US currency and sells this money to the Federal Reserve.

The Federal Reserve banks themselves are also unusual in that they are legally in a gray area, operating as something between a private company and a public institution. This is part of why the American central bank can seem so strange to other countries, as it is unique among the world’s financial systems.

So, while the Federal Reserve is part of the government and helps shape economic policy, it is independent enough to be considered its own entity independent of the government that relies on its services.

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Chad North