Growing up, my family subscribed to the Toronto Star. I used to read the sports section exclusively. Eventually, I started to also read other sections — first Greater Toronto, then Entertainment, then the frontpage news section. Only now, when I visit home, do I occasionally starting to read the Business section. Looking back, I think that I started to embrace each section when I understood the domain; since I knew a lot about professional sports, I derived value from absorbing as much information about them.
For this assignment, I chose to try to understand the Federal Reserve, which holds a meeting of the Federal Open Market Committee (FOMC) on Wednesday. The new Federal Reserve Chair, Janet Yellen, will hold her first post-FOMC press conference to discuss the Fed’s view of the economy and the actions that it will take.
Interestingly, the Federal Reserve runs a website called Federal Reserve Education” which was very helpful for writing this explainer.
What is the Federal Reserve? What does it do?
The Federal Reserve was created by the Federal Reserve Act of 1913. It was charged by Congress to “to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.” Somewhat like the process of appointing a Supreme Court Justice, the President appoints the Chair of the Federal Reserve, but the decisions of the Federal Reserve are independent — they are not ratified by neither Congress nor the President.
Who is “in” the Federal Reserve? How is it structured?
While it’s commonly shortened to the “Fed”, it may be helpful to think about the full name, the “Federal Reserve System.” The Federal Reserve System includes the seven-member Federal Reserve Board of Governors (chaired by Janet Yellen), twelve regional Federal Reserve Banks, and the twelve-member Federal Open Market Committee (FOMC)
Learn more: Structure of the Federal Reserve System
What’s happening at this Federal Open Market Committee meeting?
Observers are suggesting that the Fed will continue to taper its bond-buying program in place since the financial crisis. With interest rates near zero, this has been the Fed’s main instrument of stimulating the economy. Among other intended effects, buying government bonds reduces their yield, making other investments (corporate bonds, stocks, and other investment vehicles) more attractive. Despite possible signs of weakness in the economy, the Fed is expected to continue reducing its purchase levels.
Why does Ron Paul hate the Fed? Should we have a gold standard, Bitcoin, or some other kind of central banking system than the one that exists?
There is a lot to unpack in this question, but one fact that all sides can likely agree on is this: through the Federal Reserve System, the federal government has fairly powerful levers to affect monetary policy and, in turn, the economy as a whole. Some would argue that these powers can be abused; the current Federal Reserve System, is predicated on the argument that such powers are, on balance, useful and important for economic growth and stability.