The Federal Reserve System—or the “Fed” as it’s known—arguably plays the most crucial role in the U.S. economy.
Yet most people have little idea how the Fed works, what it actually does and why its decisions have so much impact. Here are the details.
What is the Federal Reserve?
The Fed is the gatekeeper of the U.S. economy and is part of the federal government.
Based in Washington, D.C., the Fed is the bank of the U.S. government and regulates the nation’s financial institutions. It’s comprised of a network of 12 Federal Reserve Banks and a number of branches. This is all overseen by the Fed’s Board of Governors, which we’ll detail a little later.
Besides being the nation’s central bank, the Fed studies economic trends and makes policy decisions on how to make the economy “run better.”
The Fed is an independent agency—which means it can make decisions on its own, without needing approval from any other branch of government. However, it is subject to questions from Congress over its actions. The Federal Reserve chairman regularly testifies to both the Senate and the House.
But while the Fed has to explain itself, it is theoretically free from political pressure. One caveat on this ‘freedom’—Fed board members are nominated by the President and must be approved by the Senate.
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