Page 4 - ISQ - April 2022

What is the Federal Reserve:

Goals and Tools

Scott J. Brown, PhD, Chief Economist, Raymond James

The Federal Reserve (Fed) is the central bank of the US. It governors, the New York district bank president, and four other
was created by Congress in 1913 to prevent financial district bank presidents (who rotate in January), sets monetary
policy. While only FOMC members vote on monetary policy, all
panics. Its responsibilities have grown over time. While senior Fed officials participate at policy meetings.
sometimes referred to as the unofficial fourth branch of
government, it is quasi-governmental – independent, but The Fed also supervises and regulates banks, promotes consumer
protection and community development, and works to ensure
answerable to Congress. The Fed is made up of the seven- stability in the financial system. The Fed acts as a bank to other
member Board of Governors in Washington, DC and 12 banks, clearing checks, making electronic payments, and
Federal Reserve Banks around the country. The Fed providing currency.
governors are appointed by the president and confirmed
by Congress, with terms of 14 years. The Chair, Vice Chair, MONETARY POLICY GOALS
In regard to monetary policy, the Federal Reserve Act states that
and Vice Chair of Supervision (also governors) are the Fed “shall maintain long-run growth of the monetary and
appointed to four-year terms. The 12 regional bank credit aggregates commensurate with the economy’s long-run
presidents are appointed by the boards (composed of potential to increase production, so as to promote effectively the
private citizens) of each of their individual banks. goals of maximum employment, stable prices, and moderate
long-term interest rates.”
One of the Fed’s main tasks, and the one most critical to financial
markets, is monetary policy – the setting of short-term interest The Fed interprets “stable prices” as low, but positive, inflation.
rates to achieve the optimal performance of the economy. The This gives the Fed some room to support the economy with low
Federal Open Market Committee (FOMC), made up of the Fed interest rates during a recession and allows inflation-adjusted
wages to adjust downward during periods of economic weakness.

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