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I subscribe to a Republican-loving, Right-Wing publication and am CONSTANTLY amazed at how far they’re willing to twist themselves into pretzels searching for relevancy. THEY FAIL.
The truth is we’re not in the throes of a “greater Depression,” and we’re not facing a tsunami of bankruptcies. In fact, the stock market is hitting new record highs, while employment is rising fast again thanks to Biden Administration efforts to “get the lead out” (lead being a euphemism for “vaccines into arms, not warehouses”.
For all of these things, thank one institution above all others: the Federal Reserve.
The Federal Reserve is the central bank of United States. It was formed by Congress in 1913 to help make the national economy and financial system safer and more stable. But just what does The Fed do? Let’s find out.
WHY IT MATTERS
The coronavirus crisis has made it abundantly clear that central banks hold real power in general. THE FED does in particular. We at BW2W realized during the Trump years just how ill-informed many of us are about how our government works and so are ill-equipped to make good decisions or to recognize bogus and dangerous information put out by groups like QAnon and even our own Congress. Public opinion is subject to a variety of influences that develop and alter its views on nearly every aspect of life today. Religion, science, art, commerce, industry are all states of motion. Societies and their institutions are shaped by strong convictions and desires of individuals. So we hope to explore with you some things most of us know little of and think little about.
The big picture: Most of the time, THE FED is a deliberately slow and quiet agency, keeping a close eye on thousands of economic indicators and trying its best to keep employment high and inflation low.
First, I need to tell you that BW2W learned that although THE FED is the central bank of the United States, it is not really a true government institution. The Federal Reserve is not funded by tax dollars, and its decisions do not have to have approval by the President or either house of Congress.
So who governs The Fed? The Board of Governors, a seven-member committee chosen by the U.S. President and confirmed by the U.S. Senate, serving 14-year terms. The Fed, however, is subject to Congressional Oversight and any changes in the law that Congress passes.
In a crisis, like the coronavirus pandemic we’ve all been struggling through, the Fed has shown that it is both willing and able to create liquidity as needed to get the economy floating happily again.
The Republican Party decided they would pose as the Thrifters and Protectors against Deficit Spending for many years. This all went out the window as the Trump era demanded funding and pocket-stuffing and they became big spenders. Now with the change back to a Democrat Admin they are again attempting through WOE-IS-ME-ing posturing very publicly about Biden’s economic irresponsibility and the needs of the public be cursed.
Minneapolis Fed Chair Neel Kashkari memorably stated on “60 Minutes” in March 2020:
“There is an infinite amount of cash in the Federal Reserve. We will do whatever we need to do to make sure there’s enough cash in the banking system.”
Now one of the world’s most influential economic bodies responsible for steering policy and regulation of the nation’s banks has placed two issues on their table recently.
On climate: The Fed is behind its peers around the globe where climate change is less politicized. Two committees have been set up to look at the impact of climate change on the economy and banks.
On race: Fed officials have implied that the national unemployment rate wouldn’t be the only jobless measure they look at when measuring the health of the economy.
Black unemployment — which tends to fall much more slowly — might also be a factor.
It’s a big deal for an institution that rarely — if ever — speaks publicly about these issues, or interweaves them into considerations about the economy.
What exactly does the Federal Reserve Bank do?
The Fed influences the money supply and credit conditions in order to accomplish several goals:
* to promote steady prices and full employment,
* to promote stability in the financial system, and
* to facilitate sustainable economic growth.
Other duties include regulation of the banking industry and making sure consumers have access to the information they need in order to participate in the financial system.
The Price of Money: Interest
It is important to have a basic understanding of what interest rates are (an interest rate is the price of money) and the influence they have on the overall economy. For example, the interest you pay on a loan or credit card is the price the lender charges you to use their money. The price of money, like any other good, is determined by supply and demand. The Fed influences the price of money (interest rates) by controlling the supply of money.
Sometimes it is difficult to understand how the supply of something can be such an important part of its price. In general, a good that is plentiful, such as loaves of bread, will be inexpensive. Goods that are scarce, like diamonds, are expensive.
The same principle applies to the cost of most goods, including money. If money is plentiful, it becomes inexpensive as interest rates fall. If it is scarce, it is more expensive when interest rates increase. By changing the supply of money in circulation, the Fed changes the price of money.
The Federal Open Market Committee (FOMC)
The Federal Open Market Committee (FOMC) is in charge of controlling the money supply. This committee is made up of the seven members of the Board of Governors and five Reserve Bank Presidents from around the nation. The President of the Federal Reserve Bank of New York is always a member of the FOMC. The Fed changes the price of money through the use of monetary policy. In simple terms, monetary policy is the manner by which the Fed controls the supply of money to the economy.
The FOMC controls the money supply in the following three ways:
Buying and Selling Treasury and Federal agency securities on the open market. If the Fed feels that lower interest rates will benefit the economy, they will buy large amounts of Treasury Bills and other government securities. By purchasing these securities, the Fed injects large amounts of cash into the economy. They make money more plentiful. Just like most goods, when money becomes plentiful, it becomes less expensive. By contrast, if the Fed wants to increase interest rates, they sell large amounts of securities and the money that is paid by the buyers is taken out of circulation. Money becomes scarce and therefore, more expensive.
Changing reserve requirements for banks. Banks are required to keep a percentage of their clients’ deposits on reserve to facilitate orderly withdrawals. If the Fed increases the reserve requirement, it increases the amount of money kept out of circulation, which pushes interest rates higher. If the Fed decreases reserve requirements, rates tend to fall.
Changing the Discount Rate. The Discount Rate is what the Fed charges banks that borrow directly from it. These are very short-term loans, usually overnight, meant to cover shortfalls in reserve requirements. The Fed sets this rate directly instead of through supply and demand. When banks need to borrow money to supplement their reserves, they will generally borrow from each other. Banks typically will only borrow directly from the Fed as a last resort.
The FOMC bases their interest rate decisions on many different economic and financial statistics. They consider factors such as inflation, consumer confidence, GDP growth and the general health of the overall economy. There are many reasons, some quite complex, that would cause the Fed to change the money supply. The following are a couple of simple but common examples:
* If economic growth is slow, the Fed would reduce interest rates by increasing the money supply to make more money available to businesses and consumers in the hope it would stimulate faster growth. This is sometimes referred to as “easing.”
* If the prices of goods and services begin to rise at a faster rate than is desirable, the Fed would tend to raise interest rates by decreasing the money supply to slow the economy down. This is sometimes referred to as “tightening.”
How the FED affects you
Changes in the money supply affect a host of variables. It does take some time for a change in the money supply to affect the entire economy. Most consumers do not feel the results of monetary policy changes for between 8-18 months, depending on economic conditions at the time. Any changes in the money supply will influence the amount of credit that is available and the interest rates charged, as well as prices, employment, exchange rates, and consumer spending. The following points describe how decisions at the Fed affect you:
The moves the Fed makes influence how much
interest you will earn on a savings account,
CD, or money market fund.
Changes in monetary policy often have an effect
on stock prices, which may affect your
Monetary policy influences interest rates on
auto loans and credit cards.
Rates in the bond markets are influenced,
which in turn will influence the interest you
pay when applying for a mortgage. If you have
an adjustable rate mortgage, Fed policy may
even cause your monthly payment to change.
The Fed can affect your job situation. Changes
in interest rates influence when businesses
expand and hire or cut costs and fire.
By controlling the money supply, the Federal Reserve System can have a significant impact on our financial well-being. Having an understanding of what the Fed does and how it can affect us is important for everybody.
WATCH: Resistance from Republicans.
The latest: Sen. Pat Toomey, the top Republican on the powerful Senate Banking Committee, warned this week of “mission creep” at the Fed’s regional banks, pointing to their research on topics like climate change and racial justice.