The History of the Fed

Over the last several years, you’ve probably heard one of the bigger market stories involving the Federal Reserve, often referred to as the Fed. Now, the main focus of those stories has been interest rates. Is the fed going to cut them, or is the fed even going to raise them? Today in our money market segment I’m going to be looking at the history of the Fed and what it’s done during economic events in our nation’s history.

The Fed is the central bank of the United States, so its core responsibilities are to conduct monetary policy, supervise financial institutions, maintain financial stability, and also provide payment services. But the Fed hasn’t always been around. So for decades, America operated without a central bank. And it wasn’t smooth sailing. Now, in the 19th and early 20th centuries, those were marked by repeated financial panics like bank runs, market crashes and economic chaos.

But the tipping point came with the panic of 1907, when the financial system nearly collapsed. Now, that crisis convinced lawmakers that the country needed a more stable and structured system. So in 1913, President Woodrow Wilson signed the Federal Reserve Act into law, creating the Federal Reserve System. So the Fed is designed with a unique structure. Now they have a board of governors that’s located in Washington, D.C., and then there are 12 regional Federal Reserve Banks spread across the country.

So this setup was meant to balance the national oversight with regional input, and to avoid concentrating too much power in one place. Now, over time, the Fed’s role expanded, mostly due to economic events in our country. So first, there was the Great Depression in the 1930s, where the Fed faced criticism for not doing enough to prevent bank failures.

In response, the reform strengthened its authority. And then, between 1965 and 1982, the United States experienced the great inflation. So to combat this, the Fed’s chairman raised interest rates to unprecedented levels in 1979. A deep recession resulted, but prices eventually then stabilized. And then decades later, during the 2008 financial crisis, the Fed again took aggressive action, cutting interest rates to near zero, and also introduced emergency lending programs to stabilize the economy.

And then lastly, during the Covid 19 pandemic in 2020, it moved just as swiftly, slashing rates again, launching massive bond buying programs and then rolling out emergency programs to support businesses, local governments and financial markets as the global economy came to a screeching halt. So, as history tells us, the Fed is essential for maintaining our economy. And more than a century after its creation

its decisions still shape everything from mortgage rates to job growth, touching the financial lives of nearly every American.