» Stock Investing Basics » Federal Reserve Board (Fed) Functions and Importance

Federal Reserve Board (Fed) Functions and Importance

There is constantly news on the different media where the name of the Fed is mentioned. However, very little is known by the average investor about the activities of the Fed and its nature as a whole.

The Federal Reserve Board, commonly referred to as the Fed represents the bank of the US nation. It is the institution that is responsible for the keeping of the economy in stability as well as for the providing for a strong financial system.

The strong and stable financial system is supported by the activities of 12 Federal Reserve Banks that are located around the country. They serve as banks to commercial banks.

Federal Open Market Committee Meetings

The Fed's influence on the stock market is most highly felt at the Federal Open Market Committee meetings that are held eight times every year. At these meetings the Fed representatives set the key fed funds rate. This interest rate represents the basis for the calculations of all other interest rates. Additionally, a movement by this interest rate corresponds to a movement in the rest of the interest rates.

Generally, a certain level of cash resources is required to be held by the banks. This level is determined by the level of deposits banks have. If the bank falls short of the required level due to its daily transactions, it can borrow money from another bank. The interest rate, which the other bank charges, is the fed funds rate.

Fed Functions

The function of the Fed is to regulate the speed of the economy. It uses interest rates as a tool to accomplish its goal. The Fed will increase the interest rates if the economy is growing too fast. In this way the consumer's spending will be decreased. On the other hand, if the speed of the economy is too low, the Fed may decrease the interest rates in order to encourage consumer spending and business activity.

However, you should keep in mind that the actual rate is determined by the market conditions. All the Fed does is to set a target rate.

Federal Reserve Board Importance

The major goal of the Fed is to prevent the inflation from going to high levels. Inflation can occur as a result of the fast growth of the economy. Another course of action is the falling of the economy in recession, which means that the economy has slowed down.

The Fed can be defined as the driver of the markets since it regulates its speeds. So, keep a close eye on the meetings of the Fed and the announcements they make after the meetings, since a view on the interest rate direction can be made.

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