The Fed ..more on what the Federal Reserve does
What does the Fed do?
The Central Bank is an entity separate from the three parts of the Government and beholden to none. Congress, the Supreme Court and the President cannot influence or control the Fed. No one can profit from the Fed. The stockholders (the banks) can only redeem their stock at par. Profits either go into a surplus fund or are returned to the Treasury. Stockholders get a dividend comparable to the interest earnings on the demand deposit funds they must keep at the Fed.
The Fed was set up in a way that prevents other parts of the Government from using monetary policy to influence the economy. The Fed was also set up to prevent runs on banks. It provides liquidity to banks only if the bank cannot borrow what it needs from other member banks.
The Fed also controls the discount rate. This is the percentage of deposits (cash, plus demand deposits) to loans that the banks must maintain. Today we have a reserve factor of 10% for demand deposits. So, if the bank gets a $100 deposit it can lend $1000. The bank’s reserve is a function of its liabilities. It has nothing to do with the assets created by lending transactions. The discount rate is rarely changed by the Fed. The Fed is also responsible to audit its banks and is responsible for the administration of a number of Federal laws like Truth in Lending.
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