The Federal Reserve has many powers that can affect stock
prices. Investors/Traders need to know
what the influences have on the markets.
The Federal Reserve makes decisions/announcements that affect the
financial industry. The decisions, announcements,
and the anticipation of the announcement all have the power to affect the stock
market. If you understand The Federal
Reserve you can make a more educated prediction and adjust your trades
accordingly. In this article it is my
goal to make you become familiar with the Fed as it is a very complex but very
vital to the economy that we have in the United States.
Goals for Monetary
Policy:
Price Stability
Full Employment
Economic Growth
Interest Rate Stability
Stability of the Financial System
Stability of the Foreign Exchange Markets
The Federal Reserve is the central banking system in the
United States. The Fed has many goals
that are to stabilize our economy. The
stabilization of the economy is very complex and takes a lot of time and
analyzing of how the decisions they are making will affect the U.S. economy
The Federal Reserve was first set up for the safety and
efficiency of the payment system as the government had to standardize the money
so that payment would be made simple for individuals to make transactions. Today the Federal Reserve has taken a larger
roll and appears to become more and more important every year.
Federal Reserve
Structure:
The Federal Reserve System is unique as it is both public
and private and is described as “independent within the government” rather than
”independent of government”. The system
does not require public funding. The
four main components of the Federal Reserve System are the Board of
Governors, Federal Open Market
Committee, the twelve regional Federal Reserve Banks, and the member banks
throughout the country.
Board of Governors:
The Board of Governors consists of seven members of the
federal agency. It is in charge of
overseeing the 12 District Reserve Banks and setting national monetary
policy. The BOG also supervises and
regulates the U.S. banking system in general.
The Governors are appointed by the President in staggered 14 year
terms. The current chair of the Board of
Governors is Janet Yellen.
Federal Open Market
Committee:
The Federal Open Market Committee (FOMC) has 12 members that
include the seven from the Board of Governors and five of the regional Federal Reserve
Bank presidents. The Federal Open Market
Committee is in charge of open market operations.
Twelve Regional
Federal Reserve Banks:
The twelve Federal Reserve Banks are located in Boston, New
York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St Louis,
Minneapolis, Kansas City, Dallas, and San Francisco.
Member Banks:
The majority of the commercial banks are member banks with
The Federal Reserve. National banks must
be members, state chartered banks may join by meeting certain requirements.
Monetary Policy:
The Federal Reserve controls monetary policy in The United
States. Monetary Policy consists of the
availability of money and the cost to borrow money to promote economic
growth. During the recession of 2008 The
Federal Reserve made more money available to the people using open market
operations. The Federal Reserve also
kept and continues to keep interest rates low so that people will continue to
borrow and keep spending and a steady flow of money throughout the
economy. Experts say that The Fed did a
very good job during the recession from keeping the U.S. economy out of a
depression.
Tools of monetary policy include open market operations,
discount rate, and reserve requirements.
The open market operations is the buying and selling of U.S. government
securities. This adds to the reserves or
decreases from it depending on if the Fed is purchasing or selling the
securities at that time.
The Discount Rate is the interest rate for overnight loans
that member banks borrow directly from the Fed.
This tool is the least used tool as The Fed is the lender of last resort
so most bank will lend from other financial institutions before they borrow
from the central bank. The discount rate
that The Fed sets dose have an effect on the overall interest rates in the
market.
Reserve Requirement is another tool used in monetary
policy. The reserve requirement is a
percentage of all deposits that a financial institution must have on hand at
any given time. The reserve requirement
is set by The Board of Governors. If the
Fed wants to increase money supply they will lower the reserve requirement so that
the financial institutions will have more money to lend into the economy. The other way around they can raise the
reserve requirements to decrease to money supply.
Summary:
The Federal Reserve is currently facing a couple issues as
the economy is seeing improvements. They
want to stop the purchasing of securities (OMO) and increase interest
rates. People are getting worried that
if they do these things the stock market will end its bull market run that it
has been having and the economy will slow as fewer people will borrow to
purchase houses due to the higher interest rates. The Federal Reserve has a very difficult task
to accomplish because they don’t want to hurt the stock market, housing market,
inflation of the dollar, and revert into a recession again. The Federal Reserve will have to make a
decision very soon to do so it is just a matter of time. I would definitely keep a watch on The
Federal Reserve as these things could be happening anytime. This is one of the reasons for you to watch
the fed very closely because they have the power with just one announcement to
affect the stock market and general economy.
The link I have included will send you to one of my posts that
talks about The Federal Reserve and has many links about The Federal Reserve if
you wish to read more and educate yourself on the topic.
Key Terms/Definitions
Related to the Fed:
Money Supply-Is
the total amount of monetary assets in an economy at a specific time.
Required Reserve-Financial institutions are required to maintain minimum reserves equal
to a percentage of deposit liabilities.
Fed Funds Rate (interbank lending rate)-The rate at which banks and other depository
institutions lend excess reserves.
Open-Market Operations-The purchase or sale of government securities by the
Federal Reserve. Open market operations
are used to increase or decrease bank reserves and the monetary base.
Discount Rate-The
interest rate a financial institution must pay to borrow reserve deposits from
its regional Federal Reserve Bank.
