Intelligent Investing #71 Glenn Leest, The Federal Reserve
Manage episode 361388002 series 3405989
The Federal Reserve in More Detail
1. We have covered the federal reserve in previous episodes, why are you doing another episode on it?
a. The Federal Reserve has been more prominent in the daily lives of Americans over the past 3 years.
b. The policies they set are impacting all Americans, so understanding its function will help us be well informed. An informed investor is usually a successful investor.
2. What is the Federal Reserve?
a. The Federal Reserve System, also known as the "Fed", is the central banking system of the United States. Its primary purpose is to promote a stable and healthy economy by regulating the money supply, managing interest rates, and overseeing the banking system.
b. The Federal Reserve is composed of twelve regional banks located throughout the country, with a central Board of Governors in Washington D.C. The Board of Governors consists of seven members appointed by the President of the United States and confirmed by the Senate, who serve 14-year terms.
3. Monetary Policy, what does that mean and how does the Fed effect monetary policy?
a. One of the primary tools used by the Fed to influence the economy is monetary policy. The Fed can adjust the money supply by buying or selling government securities in the open market, which affects the interest rates that banks charge for loans. By changing interest rates, the Fed can influence borrowing and spending by consumers and businesses, which can in turn impact economic growth and inflation.
b. Open Market Operations: The Fed buys or sells government securities in the open market to influence the supply of money in the economy. When the Fed buys securities, it injects money into the economy, which increases the money supply and lowers interest rates. Conversely, when the Fed sells securities, it removes money from the economy, which decreases the money supply and raises interest rates.
c. Discount Rate: The discount rate is the interest rate that banks pay to borrow money from the Fed. By raising or lowering the discount rate, the Fed can influence the cost of borrowing for banks, which can affect the amount of credit available to consumers and businesses.
d. Reserve Requirements: Banks are required to maintain a certain percenta
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