What is FED and it's impact over global economy

The US Federal Reserve System, or simply the FED, is the central bank of the United States. It was created in 1913 by the Federal Reserve Act and has since become one of the most powerful financial institutions in the world. The FED's primary responsibility is to conduct monetary policy, which involves controlling the supply of money and credit in the economy. This article will explain what the FED is, how it works, and its impact on the global economy.

What is the FED?

The Federal Reserve System is a network of twelve regional banks located throughout the United States, each with its own board of directors. The head of the FED is the Board of Governors, which consists of seven members appointed by the President of the United States and confirmed by the Senate. The Board of Governors is responsible for setting monetary policy, supervising and regulating banks and other financial institutions, and conducting research on economic issues. The Chairman of the Board of Governors is the most visible spokesperson for the FED and is often referred to as the "most powerful person in the world" because of the FED's immense influence on the global economy.

How does the FED work?

The FED's main tool for controlling the money supply is open market operations. This involves buying and selling government securities, such as Treasury bonds, on the open market. When the FED buys securities, it injects cash into the economy, which increases the supply of money and credit. When the FED sells securities, it withdraws cash from the economy, which reduces the supply of money and credit. By adjusting the amount of securities it buys and sells, the FED can influence the level of interest rates in the economy, which in turn affects borrowing and lending behavior.

The FED also sets the federal funds rate, which is the interest rate that banks charge each other for overnight loans. This rate serves as a benchmark for other interest rates, such as those on mortgages, car loans, and credit cards. By adjusting the federal funds rate, the Fed can influence the cost of borrowing and the level of economic activity.

In addition to these monetary policy tools, the FED also supervises and regulates banks and other financial institutions. It sets capital requirements, conducts stress tests, and enforces regulations to ensure the safety and soundness of the financial system. The FED also serves as the lender of last resort, providing emergency loans to banks and other institutions during times of financial stress.

Impact of FED on the US economy

The Fed's actions have a significant impact on the US economy. By controlling the money supply and interest rates, the Fed can influence economic growth, inflation, and employment. For example, if the Fed believes that the economy is growing too slowly, it can increase the money supply and lower interest rates to stimulate borrowing and spending. This can lead to increased economic activity, job creation, and higher inflation. On the other hand, if the Fed believes that the economy is growing too quickly and inflation is becoming a problem, it can reduce the money supply and raise interest rates to slow down borrowing and spending. This can lead to slower economic growth, lower inflation, and higher unemployment.

Impact of FED on the Global economy

1. Monetary policy: The Fed sets the monetary policy of the United States, which includes controlling interest rates and the money supply. Changes in interest rates can affect the cost of borrowing, inflation, and the value of the US dollar. These changes can have significant spillover effects on the global economy, as they can influence capital flows and exchange rates.

2. Financial stability: The Fed is responsible for maintaining the stability of the US financial system. Any disruptions in the US financial system can have significant spillover effects on the global financial system, as the US dollar is a key currency in international transactions.

3. Global financial crises: The Fed played a critical role in responding to the 2008 global financial crisis, which had significant spillover effects on the global economy. Its actions, such as providing liquidity support to foreign central banks, helped stabilize financial markets and prevent the crisis from spiraling out of control.

4. Trade policy: The Fed's actions can also affect US trade policy. For example, changes in interest rates can affect the value of the US dollar, which can affect the competitiveness of US exports.