What is the Federal Reserve?

So what is the Federal Reserve? You probably hear them talking about it in the News a lot, oh what’s the Fed doing? When you hear the Fed is lowering rates and the market goes up and then you hear oh, they’re raising rates and the market goes down. But what exactly are the responsible for? So going back, the Federal Reserve was created back in 1913. And they talked about whether this should be a private entity or a governmental organization. So controversy surrounded this as you can imagine and in the end there was a compromise. They essentially had government appointees as well as then the CEOs of the large central banks working together. So objectives and goals of this is essentially a dual mandate where the Federal Reserve is trying to control inflation while keeping low unemployment. But these two things are typically going to be opposed to each other. So low unemployment, usually inflation grows. You figure wages are higher. There’s going to be higher demand maybe with less supply. But ideally the Federal Reserve likes to keep inflation around 2%. Which until recently we’ve seen that spike, but previous to that for about 10 years or so it did average around that 2% figure. So the Federal Reserve is going to essentially control the money supply by buying Treasuries and increasing the money supply. But they can track that then by selling those securities. So they’re also going to control different interest rates. They’re essentially going to act as the bank to all of the banks. So the banks are going to borrow money then from the Federal Reserve and again that biggest goal or objective is to make sure that there’s no run on the banks. It makes me think of the classic movie from I think the mid-40s of “It’s a Wonderful Life.” And that character George Bailey played by Jimmy Stewart. And how he had to explain to everyone that came into the bank saying I want my money. Well your money has been lent over here to this neighbor and to that neighbor and you know it will be you can’t get all your money right now. Give it time and you’ll get that money back. So the Federal Reserve really plays a very important role in the overall economy. So it’s one where it’s worth paying attention to this and seeing where interest rates move and what those different unemployment figures look like over time and that will help determine sort of where the economy, where potentially the market is moving. So hope you found this information helpful as you plan to retire well.