Federal Reserve System (The Fed)

Definition

The Federal Reserve (The Fed) is the central banking system of the United States. * Created in 1913, it consists of the Board of Governors in Washington, D.C., and 12 regional Federal Reserve Banks located in major cities throughout the U.S. * It is widely considered the most powerful financial institution in the world.

The Dual Mandate

Unlike many other central banks that focus solely on inflation, the US Congress has given the Fed two co-equal goals: 1. Stable Prices: Keeping inflation under control (Target: 2%). 2. Maximum Employment: Promoting the highest level of employment the economy can sustain.

The Power Center: FOMC

The Federal Open Market Committee (FOMC) is the branch of the Fed that determines the direction of monetary policy. * They meet 8 times a year to set the Federal Funds Rate (the benchmark interest rate). * The Dot Plot: A chart released quarterly that shows where each Fed official expects interest rates to go in the future. Investors study this religiously to predict market trends.

Independence

• Although the Fed's chair is appointed by the US President, the Fed operates independently within the government.
• "Independent within the government" means they don't need approval from the President or Congress for their policy decisions, shielding them from short-term political influence.