This article, Learn Forex Trading will introduce you to the Federal Reserve system. One of the organizations with the greatest influence on the world’s financial markets. You will understand what the FED is, the structure of the FED system, and its functions, and Explain the Federal Reserve system for the financial market. Thereby helping traders have a suitable forex trading strategy.
Explain the Federal Reserve system What is that?
The FED is an organization with significant influence on the world financial market.
What organization is the FED?
FED stands for Federal Reserve System, also known as the United States Central Bank. The FED is an organization established in 1913. To provide a flexible monetary system. At the same time stable and safe for the US economy.
The FED is an organization that plays an important role in operating US monetary policy. Monetary policy is the Fed’s decision about the amount of cash and interest rates in the economy. The most important item is maintaining price stability. Thereby, creating conditions for the economy to develop and promote employment.
In addition, the FED is also responsible for providing financial services to commercial banks, the federal government, and international organizations. In addition, the FED is also responsible for supervising and managing financial institutions to protect the safety and efficiency of the financial system.
See more: What is inflation that has a strong impact on Forex?
What is the system structure of the Fed?
The Fed system includes three main levels:
- Board of Governors. This is the agency that decides the FED’s monetary policy. The seven-member board is appointed by the President of the United States and confirmed by the Senate. Each member is appointed for a term of 14 years, not reappointed. The board is responsible for the supervision and regulation of regional banks and other financial institutions.
- Regional banks are 12 federal banks distributed geographically and headquartered in major cities in the United States. Each regional bank has a nine-member board of directors. Of which three members are appointed by the Board of Directors and six members are elected by regional commercial banks.
- The Open Market Committee is the FED’s monetary policy decision-making body. The Open Market Committee consists of 12 members. Of which 7 members are the Board of Directors and five members are presidents of regional banks. Of these five presidents, the president of the New York Regional Bank is a permanent member. The remaining four presidents rotate according to a predetermined schedule.
Functions and Explain the Federal Reserve System for financial markets
The FED plays an important role in financial markets. The reason is that it can impact the amount of cash and interest rates in the economy. The amount of cash and interest rates are factors that influence the demand and supply of currency. In addition, it also affects the value of bonds, stocks, and other financial products.
The FED can also increase or decrease interest rates by adjusting the discount rate and federal funds rate. The discount rate is the interest rate at which the Fed lends money to commercial banks when they need short-term cash.
The FED can also increase or decrease the amount of cash by adjusting the reserve requirement for commercial banks.
FED economic calendar
The FED economic calendar is an important tool for forex traders. The FED economic calendar includes the following events and reports:
- Open Market Committee meeting.
- Weekly report on monetary and credit situation.
- Weekly reports on reserves and deposits.
- Weekly report on interbank interest rate situation.
- Monthly reports on monetary and credit situation.
- Monthly reports on salary and employment situation.
- Monthly reports on prices and spending.
In addition, traders in the forex market need to follow other important financial news. It can be mentioned as a nonfarm payrolls news.
Explain the Federal Reserve System for monetary instruments
Explain the Federal Reserve System is a monetary organization that influences the health of the world’s financial economy.
Buy and sell government bonds
Buying and selling government bonds is the FED’s main monetary tool. Government bonds are valuable debt papers issued by the United States government to finance public expenditures.
- When the FED buys government bonds, it creates digital currency and supplies it to the market. Thereby, increasing the amount of money and reducing interest rates.
- When the Fed sells government bonds, it destroys the digital currency and withdraws it from the market. Thereby, reducing the amount of money and increasing interest rates.
Discount interest rate
The discount rate is the Fed’s second monetary tool. The discount rate is the interest rate at which the Fed lends money to commercial banks when they need short-term cash.
- When the Fed lends money to commercial banks. Leading to an increase in the amount of cash in the system and a decrease in interbank interest rates.
- When the FED increases the discount rate, it will increase the borrowing costs of commercial banks. This reduces the amount of cash in the system and increases interbank interest rates.
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FED’s influence on monetary instruments
Required reserve ratio
The required reserve ratio is the Fed’s third monetary tool. The required reserve ratio is the percentage of deposits that commercial banks must keep in the bank or at the Fed. When the Fed increases the required reserve ratio, it reduces the amount of cash that commercial banks can lend. At the same time, it reduces the amount of cash in the system and increases interest rates.
See more: Opening and verifying an ICMarkets account
Explain the Federal Reserve System‘s impact on the economy
Explain the Federal Reserve System is an organization that can influence the economy by adjusting monetary policy. The Fed’s monetary policy affects economic variables. These include GDP growth, inflation, unemployment, trade balance, and exchange rates. The FED can increase or decrease interest rates by adjusting monetary tools. Including buying and selling government bonds, discount interest rates, and required reserve ratios.
What is the impact of the FED’s interest rate adjustments?
The FED interest rate is an important factor affecting the economy. The reason is that it can stimulate or slow down economic activity. When the Fed raises interest rates, it will increase borrowing costs and reduce the ability of households and businesses to consume and invest.
FED interest rates also affect the trade balance and exchange rates. The reason is that it could change the competitiveness of US goods and services compared to other countries. When the Fed raises interest rates, it increases the value of the US dollar relative to other currencies. During the economic recession cycle, the FED’s decisions to adjust interest rates had a significant impact on world finance.
Impact on the economy and the forex trade market
Explain the Federal Reserve System is an organization that can impact the economy and the forex trade market. Because it is possible to change the amount of cash and interest rates in the economy. Cash availability and interest rates are factors that influence the value of currencies, bonds, stocks, and other financial products.
When the FED changes the amount of cash and interest rates. This will cause major fluctuations in the forex trade market. The reason is that it will change the demand and supply of currency pairs.
summary
So in the above article, Learn Forex Trading has introduced you to the Federal Reserve system. This is one of the organizations with the greatest influence on the world’s financial markets. Hopefully, this article will help you gain basic and useful knowledge about the FED. As well as how the FED affects the economy and the forex trade market.
FAQs:
What is the Fed?
FED stands for Federal Reserve System, also known as the United States Central Bank.
What is the nature of the FED?
The FED is essentially an institution with the ability to create and destroy currency, both physical and digital. The FED is also an organization with the ability to influence the economy by adjusting monetary policy.
How does the FED affect the forex trade market?
When the FED changes the amount of cash and interest rates. This will cause major fluctuations in the forex trade market. The reason is that it will change the demand and supply of currency pairs.
