There are various systems and institutions which keep the U.S. economy operating while minimizing systemic turmoil. This is necessary in an unpredictable world with many factors affecting financial markets and economic realities of everyday people. One of these important institutions is the Federal Reserve System. 

What is the Federal Reserve System (FRS)? 

The central bank of the U.S. is known as the Federal Reserve System (FRS). Commonly referred to as simply “the Fed,” this financial institution is one of the most powerful in the world. The goal of the Fed is to provide the U.S. with a stable, safe, and flexible financial and monetary system. 

A seven-member board is in charge of leading the Fed. The FRS also comprises 12 Federal Reserve banks, each representing a different regional district with their own bank president. 

How was the Fed established? 

President Woodrow Wilson established the FRS by signing the Federal Reserve Act on December 23, 1913. The establishment of the Fed was prompted by the 1907 financial panic. 

What power does the Fed have? 

The Fed has broad powers to help ensure the stability of the financial system. This includes acting as the primary regulator of bank members of the FRS. The Fed is also the lender of last resort to FRS member banks who cannot find another lender. Additionally, it is the main regulator of all types of financial institutions in the U.S. 

Mandates and duties 

The Fed has two monetary policy objectives: creating economic conditions which provide price stability and full sustainable employment of the American workforce. It accomplishes this by making national monetary policy decisions to maintain moderate interest rates while keeping primary monetary policy goals in mind. The Fed will also act to contain any systemic risks to financial stability. 

Through supervision of U.S. banking institutions, the Fed ensures the safety of the financial and banking system while providing protection for consumer credit rights. The Fed also plays a crucial role in maintaining the nation’s payment systems and depository institutions. 

Independence of the Fed 

How independent the Fed should be from government is a constant debate between those who believe the Fed should not be influenced by politics and those who prefer a close coordination between monetary and fiscal policy. Technically, the Fed is independent from the government since the U.S. President, or any other government official does not need to ratify monetary or regulatory decisions made by the Fed. However, the Fed must still operate within governmental framework of fiscal and economic policy goals while still being subject to congressional oversight. 

Transparency and accountability 

Fears of overexpansion of the Fed’s balance sheet and bailouts of large financial institutions have led many to call for more auditing of the FRS which could arguably weaken its independence from the political realm. 

How does the Fed affect your investment portfolio? 

Decisions made by the Fed can have system-wide consequences which could completely change the economic terrain. For example, raising benchmark interest rates can result in higher borrowing costs for companies which can push stock valuations downward while also causing U.S. dollar appreciation. A comprehensive understanding of financial markets and economics will help you make necessary portfolio adjustments in reaction to Fed actions. Let us help you make heads and tails of our country’s complex financial and economic framework.


The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Expressions of opinion are as of this date and are subject to change without notice.  There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.   Investing involves risk and investors may incur a profit or a loss. Past performance does not guarantee future results.