Have you ever wondered, what exactly is Fed (Federal Reserve in the US) is? Why is it so powerful? Why every time the chairman of the Fed spoke something, the stock market went up and down? Why there is also a Treasury Department in the US, is it the same as Fed? In this post, I will explain.
History Of Fed
Before Fed (Federal Reverse) was created, there had been a lot of bank failures in the US. When one of the banks failed, the customers of other banks rushed to withdraw money from their own banks, this created a domino effect and caused recessions. In 1913, Fed was created with the objective to help banks acquire energy cash reserves during panic withdrawals, and establish confidence in the banking system, and stability in the economy.
Functions Of Fed
Over the years Fed’s roles and responsibilities have expanded. The main objectives of the Fed include: stabilizing prices (controlling inflation), maximizing employment, moderating long-term interest rates, regulating and supervising banks, maintaining the stabilization of the financial system, and providing financial services to banks, the US government, and foreign official institutions. Fed can change the federal funds rate, which influences interest rates like mortgage loans and affect the direction of the economy. Since the US is the biggest economy in the world, and USD is the world’s most powerful currency, any actions from the Fed have an international impact.
Difference: Fed vs Treasury Department
Fed is the central bank that manages monetary policies. Its responsibility is to keep the economy stable by managing the supply of money in circulation. The Department of Treasury manages fiscal policies, collects tax revenues, distributes budget, issues bonds/bills/notes, prints money, and advises the president on economic policies. So you can see Fed and Treasury play different roles, but they need to work closely together in ensuring the stability and growth of the economy.
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