Scott Rothbort
To the beginner investor and most noninvestors, it seems as though the Federal Reserve System acts in a cloak-and-dagger manner. Eight times a year, the Federal Open Market Committee issues its determination for policy on the federal funds rate, and this tends to be the most covered and visible action that comes out of the Fed. But as recent events show, there is more that the Fed can and will do to impact the markets and our lives.
In this installment of the Finance Professor, I will cover five things every investor must know about the Fed and why. 1. The Fed's Role The Fed is responsible for much more than determining the fed funds rates. According to the Fed's own publication entitled The Federal Reserve System Purposes & Functions, 9th Edition (June 2005), the Fed "is the central bank of the United States" and was started by Congress "to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded." This publication goes on to specify the Fed's four main duties:- "conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates"
- "supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers"
- "maintaining the stability of the financial system and containing systemic risk that may arise in financial markets"
- "providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system"
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