I regularly write about the Fed, but I generally limit my focus to its policy decisions and their effect upon the broader markets.
The Fed, or more specifically, the Federal Open Market Committee (FOMC) meets every six weeks to discuss possible changes to monetary policies.
They base that decision on key data points – the same data points that I look at. The difference is that I’m watching for how the market reacts to the news.
But, of course, the Fed’s responsibilities extend far beyond dual mandate assigned by Congress.
The Federal Reserve System is the central bank of the United States. The system consists of 12 Federal Reserve Banks (Districts).
Congress overseas the Federal Reserve System but the Fed is an independent organization. This separation buffers the Fed against undue political influence. That means that the Fed’s decisions do not require approval by the Executive Branch.
The Fed performs five general tasks to promote the effective operation of the U.S. economy and, generally, the public interest.
I’m not even joking; that’s what they say!
Here’s the lowdown on the five tasks:
- Conducts the nation’s monetary policy to promote maximum employment, stable prices and moderate long-term interest rates in the U.S. economy. Okay, Congress gave the Fed a dual mandate to promote max employment and stabilize prices. What that really did is give an organization power, beyond supposed influence, to do as they wish to manipulate the U.S. dollar. They do this by tinkering with interest rates, creating money out of thin air (bond purchases or QE) and telegraphing their actions into a public reaction.
- Promotes the stability of the financial system to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad. I believe the Fed is most concerned with financial system stability. They saw the financial chaos in 2008. So when Fed officials talk about possible rate hikes, cuts or even stimulus action, their end goal is to promote stability or prop up the markets.
- Promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole. The Fed supervises and regulates the federal banking system. This is a big joke… when supervision and regulation don’t work, they will just get Congress and the Treasury Department to bail them out. In 2008, hundreds of banks were bailed out to the tune of about $245 billion! That was about 40% of the total taxpayer bailout. Great job, Fed! Since the meltdown, new “stress” tests are now part of how the Fed assesses bank stability.
- Fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S. dollar transactions and payments. This is a very important responsibility of the Fed. The Fed works with the U.S. Department of the Treasury and reports to Congress about the Automated Clearing House (ACH) system and other conduits that remit transfers to foreign countries, along with the U.S. payment system. Debit card processing, transaction fees, fraud-prevention and data security are all monitored and regulated by the Fed.
- Promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations. Okay, this is why the Federal Reserve System has hundreds of economists on their staff. The 12 Federal Reserve Districts study local business, lending, consumer issues and trend. Then, finally, it monitors bank compliance, consumer lending laws and regulations. The Fed’s studies focus on, and try and identify, the concerns of low and moderate-income people.
Anything remotely financially related like currency, banking, lending and regulation is touched by the Fed in some way, shape or form. They’re the banker for the U.S. Treasury but they’re not a fully governmental organization. The Federal Reserve Banks combine public and private elements in their organization and, as part of the Federal Reserve System, they are subject to oversight by Congress.
The Federal Reserve System is funded mainly by the interest it receives on U.S. government securities and on interest from foreign currency investments. They also receive fees for services provided to member depository institutions for check clearing, fund transfers, etc.
After expenses are paid, any remaining earnings are handed over to the U.S. Treasury.
The Fed reported that they paid the U.S. Treasury $97.7 billion in 2015! So, they are allowed to steal from us by printing money through QE, which devalues all our dollars, and then send the overage to the U.S. government… awesome.
That was an abbreviated look at what the Fed is responsible for. I mentioned that the Fed is independent and isn’t influenced by the government but, do you think they have some power over the government? I think close to $100 billion worth of it!
Whatever the Fed does or doesn’t do, doesn’t really matter. Overreaction to what happens or may happen affects prices and yields in long-term Treasury bonds and is one way Treasury Profits Accelerator subscribers profit.
Editor, Treasury Profits Accelerator