The FED is a familiar concept to those interested in investment and finance. Whether you are a new investor or have extensive experience in the stock market, talk about the FED raising interest rates is always mentioned and has a major impact on the entire market. So the concept of what is the US Federal Reserve What is the mission and role of the FED in the financial market? Let’s explore details with Learn Forex Trading in the article below.
Get an overview of what is the US Federal Reserve.
The Fed is an extremely important organization in the United States. Especially for those interested in the field of finance and investment. The FED’s policies play an important role and directly impact the global economy. Let’s learn about the nature of what is the US Federal Reserve. What is the impact of the FED on the economy?
Khái niệm what is the us federal reserve?
FED stands for Federal Reserve System. Translated into US as the Federal Reserve of the United States or it can be understood as the Central Bank of America. This organization was established and has been operating since 1913.
This is the most powerful financial institution in the world. FED policies have a huge impact on global financial markets.
The Fed was founded on the Federal Reserve Act, signed by President Woodrow Wilson. The goal of this law is to maintain flexible monetary policy. To ensure the safety and stability of the United States. In addition, the FED is the only organization authorized to print US dollars (USD). Therefore, the FED plays an important role in shaping and adjusting monetary policy. At the same time, it provides a safe, flexible, and stable financial and monetary system for the country.
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The nature of the Fed
This organization is completely independent, independent, and not influenced by the US Government. While taking on many important roles, the FED’s independence helps the organization have the ability to implement flexible policies, responding accurately to actual situations. At the same time, ensuring stability for the national financial system. Along with that, the FED helps support sustainable economic development.
The Fed’s reserves are the world’s largest concentration of money and gold. The Bank of New York City, part of the US Federal Reserve, currently holds 25% of all gold globally. Most of which is gold sent from international countries.
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What is the structure of the FED?
The United States Federal Reserve System includes many important financial facilities. So what is the organizational structure What is the US Federal Reserve? What main ingredients are included? Below is specific information:
- Board of Governors: This board has 7 members. Each person serves a 14-year term. Appointed by the President of the United States and confirmed by the Senate. The Board of Governors is responsible for managing activities and shaping key policies related to currency and finance.
- Federal Open Market Committee (FOMC): This Committee includes 7 members from the Board of Governors along with 5 FED branch bank presidents. The FOMC organization is responsible for executing these types of transactions. At the same time make decisions on monetary policy, including decisions on interest rates.
- Federal Reserve Banks: There are a total of 12 regional Federal Reserve banks across major U.S. cities. They perform many extremely important tasks. Including cash management, banking services, and implementation of monetary policies.
- Member Banks: Commercial banks in the United States can participate in the Fed system by purchasing shares of the regional Federal Reserve banks in the regions in which they operate. They participate in the activities of the Fed and are subject to supervision by this organization.
Functions and tasks of the organization What is the US Federal Reserve?
After understanding the nature and structure of what is the US Federal Reserve, investors need to understand more deeply the functions and tasks of the FED through the following information.
In the Federal Reserve Law, the functions and tasks of the Fed are detailed as follows:
- Create maximum employment opportunities for people living throughout the federation.
- Maintain prices with high stability.
- Make sure to offer long-term interest rates at a reasonable level.
Today, the Fed organization also has new roles. Like:
- Supervise and regulate banks to ensure a stable financial system and protect consumer rights.
- Adjust monetary policy to support and ensure the implementation of the three main roles above.
- Find and promptly prevent financial risks that can directly affect the economy.
- Providing financial services to the US Government and other organizations at home and abroad.
- Research the economy and publish publications to provide knowledge about the financial sector.
Monetary instruments of what is the US Federal Reserve
Understanding and understanding the monetary tools of the What is the US Federal Reserve organization can help investors better understand the FED. From there, you can build an effective and optimal trading plan.
Buy and sell government bonds
Government bond trading is a tool used to adjust the amount of money in the economy. When the Federal Reserve makes purchases of government bonds, the amount of money in the financial system increases significantly. This leads to an increase in the money supply and a decrease in interest rates. This promotes borrowing and consumption and contributes to economic development.
Conversely, when the Fed sells government bonds, the amount of money in the economy decreases. Although there is still a higher demand than the amount of money available. But this temporarily creates scarcity. This can lead to increased interest rates and difficulty in borrowing from banks. This policy is often applied when inflation is high and needs to be controlled.
Discount interest rate
When needing to mobilize capital for short-term goals, member commercial banks often borrow money from the FED. They can borrow at a discount rate that is lower than the interest rate on loans between them. Therefore, the discount rate is the tool that the FED uses to adjust the amount of money in the economy.
When the FED increases the discount rate, commercial banks will become more cautious when borrowing money. Leading to a decrease in the amount of money in circulation. On the contrary, when discount interest rates decrease, commercial banks can borrow more. This leads to an increase in the amount of money circulating in the economy.
FED’s required reserve ratio
Simply put, the Federal Reserve uses the tool “required reserve ratio” to regulate the amount of money in the economy. When the FED regulates the required reserve ratio, Commercial Banks will have to keep some cash reserves at the FED organization based on the total amount of money they have mobilized from customers. At the same time, they are not allowed to lend more than this reserve.
This tool is used to control the total amount of money circulating in the economy. When the required reserve ratio increases, the amount of money that commercial banks can lend decreases. This reduces the money supply in the economy and leads to increased interest rates. On the contrary, when the required reserve ratio decreases, the amount of money that commercial banks can lend increases. It increases the money supply in the economy and can lead to a decrease in interest rates.
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FED’s influence on US’s forex market
The FED has just announced its decision to raise interest rates and is expected to increase them. The FED’s interest rate increase may affect the US stock market in the following ways:
- Weakened world economic outlook: A tighter global financial situation could reduce the growth prospects of the world economy. At the same time, it reduces the US’s demand for export goods.
- Pressure to increase interest rates in USD: Deposit interest rates in USD may increase in the last months of the year. It continues to increase due to rising USD interest rates and inflationary pressure in the US also increasing.
- Pressure on foreign debt: An increase in USD interest rates can put pressure on the foreign debt repayment obligations of the Government and businesses in the US. Especially when foreign debt accounts for a large part of GDP.
- Impact of “Taper Tantrum”: In theory, a negative impact could appear on indirect investment capital flows from abroad due to the “taper tantrum” (FED gradually reducing bond purchases). However, the US stock market has experienced a sharp decline recently.
- Pressure on the exchange rate: A strong USD can put pressure on the US’s exchange rate. This increases the USD exchange rate. However, USD is still considered one of the most stable currencies in the region. That is thanks to the trade surplus and increased foreign exchange reserves.
Conclude
The information from Learn Forex Trading compiled above provides a detailed view of what is the US Federal Reserve and its impact on the economy. Every decision from the FED affects our personal financial situation. Therefore, understanding this information is important to build a smart investment plan. Stay up to date with your financial and investment knowledge to track important changes in the market.
Frequently asked questions
The main mission of what is the US Federal Reserve?
The Fed’s primary mission includes maintaining price stability, supporting economic growth, and maintaining employment levels.
How does the Fed affect interest rates?
The Fed influences interest rates through monetary policy measures. Including adjusting basic interest rates and buying and selling government bonds.
How can I follow the Fed’s decisions?
Fed meetings and statements are often announced publicly. You can follow announcements on the FED’s official website or through reputable financial news sources.
