Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Tuesday, June 14, 2022

How does the Federal Reserve work?

 The following blog post was written by our interns, Mauria Ferrell and Brady Gray. This is Part 2 of their series on the Federal Reserve.

As we talked about in Part I, the Federal Reserve is a central bank. They have a process they use to control the amount of money in the economy. The Fed can “create” money by giving commercial banks money to lend out to consumers. On the other hand, they can take money away from the banks, resulting in higher borrowing costs and effectively “destroying” money. The Fed is constantly trying to find a solution to keep our economy stable. It’s a continuous cycle that never ends.

Right now, they are trying to destroy money. During the pandemic we saw record low borrowing costs. That paired with fiscal policies of the government has created high inflation that we are seeing today. The Fed is trying to combat this inflation hike by destroying money and making the cost of borrowing higher. 

The Fed uses three main tools when conducting monetary policy. They are reserve requirements, open market operations, and the discount rate. They are used to grow or shrink the economy. Reserve requirements are the amount of cash that a bank must have on hand at any time. Open market operations refer to the practice of buying and selling U.S. Treasury securities. The Fed relies mainly on open market operations because this is how they purchase or sell bonds. The Federal Reserve also sets the discount rate also known as the Fed funds rate. It is charged to banks for the short-term loans they take from the Federal Reserve Bank.

Friday, June 03, 2022

What is the Federal Reserve?

The following blog post was written by our interns, Mauria Ferrell and Brady Gray. This is Part 1 of their series on the Federal Reserve.

The Federal Reserve is the central bank in the United States. They are in charge of regulating the financial system across the nation. The Federal Reserve was created to facilitate healthy economic growth, while managing to keep inflation and unemployment rates low.

So, what is a central bank? It is the bank at the center of the financial system across the United States. It is your bank’s bank. Our central bank is run by 7 board members that are appointed by the president and confirmed by the senate. The board members purpose is to conduct monetary policy. Also, it is good to know that there are 12 districts that hold 12 Federal Reserve Banks across the country.

Other countries have central banks that operate similar to ours. Some have their differences when it comes to things like managing growth and influencing value of currency in their nations. For example, the European Central Bank gives their market early notice before they make any changes to interest rates. Also, they try to keep the annual growth in consumer prices below 2 percent, unlike the Fed. 

Monetary policy refers to the measures taken by the Federal Reserve to achieve economic stability. Their goal is conduct monetary policy in a way that influences the economy to have stable prices, inflation, and employment. They want to make sure the financial system is healthy and that they are doing what is in our best interests. They do this by overseeing and managing the financial industry across the nation.

They have the power to influence the nation’s supply of money. Stay tuned for Part II of the series as we will discuss how all of this happens.