Alliance America Logo Contact About Us Articles Home
A one hundred dollar bill with arrows pointing to the Federal Reserve stamp

Do you really understand what the Federal Reserve does?

by Alliance America
September 14, 2023


The Federal Reserve plays a pivotal role in the U.S. economic landscape. Its actions and decisions can shape the trajectory of the economy, influencing everything from inflation rates to the health of the job market. If you understand the role and functioning of the Federal Reserve, you can better comprehend the broader economic forces at play.

Commonly referred to as the Fed, it is often in the headlines due to its significant role in shaping monetary policy and its impact on the economy. The actions and decisions made by the Fed can have far-reaching consequences that grab public attention. A key reason the Fed is frequently in the news is its ability to influence interest rates. Through various tools at its disposal, such as open market operations and changes in reserve requirements, the Fed can adjust interest rates to stimulate or slow down economic growth.

Changes in interest rates orchestrated by the Federal Reserve can have a profound impact on various sectors of the economy. When the Fed decides to lower interest rates, it aims to encourage borrowing and spending, thereby stimulating economic activity. This can result in increased consumer spending, higher business investments and a boost in overall economic growth. Conversely, when the Fed raises interest rates, it aims to curb inflationary pressures by discouraging excessive borrowing and spending.

These fluctuations in interest rates give rise to debates among economists and policymakers regarding their implications for economic stability. The Federal Reserve's role as a guardian of financial stability also contributes to its regular presence in the media.

What is the Federal Reserve?

The Federal Reserve is the central bank of the United States. Founded in 1913 through the enactment of the Federal Reserve Act, its primary purpose is to ensure stability and regulate the country's monetary and financial system.

The Fed operates independently from political influence, allowing it to make decisions based on economic considerations rather than short-term political gains. Besides managing monetary policy, another important role of the Federal Reserve is regulating and supervising banks within its jurisdiction. The Fed ensures that banks maintain adequate reserves to protect depositors' funds, prevent excessive risk-taking by financial institutions and safeguard against financial crises.

Additionally, as a lender of last resort during times of liquidity stress or crisis situations, it provides emergency funding to stabilize markets and prevent widespread disruptions. Overall, the Federal Reserve plays a pivotal role in shaping economic policies that impact the lives of Americans on various levels.

Its actions have far-reaching consequences for factors such as job creation or loss, borrowing costs for consumers and businesses alike as well as general purchasing power within society. As such an influential institution with significant control over monetary policy levers that shape our economy's trajectory at large, understanding its workings becomes imperative for any informed citizen seeking a comprehensive grasp on how our financial system operates.

What does the Federal Reserve do?

a hand handing a gold dollar sign to another hand

As mentioned, one of the primary roles of the Federal Reserve is to conduct monetary policy. This involves managing interest rates to control inflation, stabilize prices and promote economic growth.

Inflation, of course, refers to a sustained increase in the general price level over time. The Fed sets a target inflation rate to ensure that it remains moderate enough not to erode purchasing power but also sufficient to encourage consumer spending and investment.

The Federal Reserve achieves its monetary policy objectives primarily through open market operations. It buys or sells government securities on the open market with commercial banks or investors, thereby influencing short-term interest rates.

By adjusting these rates, such as the federal funds rate or discount rate charged to banks for borrowing funds from the Fed, they can stimulate or slow down economic activity.

Meanwhile, the Fed oversees thousands of banking institutions across the country to ensure their safety and soundness. It sets regulations that aim at reducing risks within these institutions by imposing capital requirements and conducting regular examinations.

Furthermore, in times of financial crises or systemic risks that could disrupt economic stability on a larger scale, it is up to the Federal Reserve to step in as a lender of last resort. During such times, it provides liquidity support to distressed financial institutions that might otherwise face severe difficulties due to market disruptions or runs on their deposits.

These are just some key functions that highlight what the Federal Reserve does: conducting monetary policy by influencing interest rates to manage inflation and promote economic growth, supervising and regulating banks to maintain a stable financial system and acting as a lender of last resort during times of financial crises. The Federal Reserve's role is crucial in ensuring the stability and resilience of the U.S. economy, making it an institution that frequently garners attention from economists, policymakers and the general public alike.

Who owns the Federal Reserve?

The ownership of the Federal Reserve is a topic that often sparks curiosity and debate among both economists and the general public. To fully understand who owns the Federal Reserve, it is important to delve into the structure of this institution. The Federal Reserve System operates as a decentralized entity with a combination of public and private elements.

It’s important to address the misconception that the Federal Reserve is privately owned by individuals or banks. While it may be true that certain member banks have shares in their respective regional Federal Reserve Banks, these shares do not confer ownership in the traditional sense.

Instead, they represent membership and provide certain rights within the Federal Reserve System. The majority of shares in each regional Federal Reserve Bank are held by commercial banks within their district.

These member banks are required by law to hold stock in their local Fed bank. However, these shares cannot be bought or sold on any public stock exchange and do not carry voting rights or control over the operations of the Fed.

Instead of being owned by private entities, such as individuals or commercial banks, ultimate control over the Federal Reserve rests with Congress and the president. The Board of Governors is appointed by the president with Senate approval, while other key positions within regional Fed Banks are also subject to government appointments.

While member banks hold shares in their respective regional Federal Reserve Banks, this does not grant them ownership or control over monetary policy decisions. The true ownership lies within the framework established by Congress and regulated by government-appointed officials.

Why are Fed meetings so important?

people figurines forming a circle around one person insuating a meeting

Fed meetings hold significant importance due to their impact on the overall economy and the direction of monetary policy.

During these meetings, members of the Federal Reserve's Federal Open Market Committee (FOMC) come together to assess economic conditions, analyze financial markets and make decisions regarding interest rates. These decisions have far-reaching consequences for businesses, consumers and financial institutions.

One key reason why Fed meetings are crucial is their ongoing role in determining interest rates. The Federal Reserve has the power to adjust short-term interest rates, known as the federal funds rate.

Market participants eagerly anticipate each meeting for insights into potential changes in monetary policy. Media coverage of these gatherings adds further significance to the events.

Analysts and investors closely scrutinize every word spoken by Fed officials during press conferences following these meetings, looking for clues about future moves in interest rates or changes in economic outlooks. The outcome of Fed meetings also has international implications as other central banks around the world often take cues from their U.S. counterpart's actions or statements.

Given that the United States has one of the largest economies globally, any shifts in U.S. monetary policy can impact global financial markets and exchange rates.


The Federal Reserve plays a crucial role in the U.S. economy as the central bank responsible for setting monetary policy. Its actions have far-reaching effects on various aspects of the economy, including inflation, interest rates and overall economic growth.

Through its use of tools such as open market operations, reserve requirements and discount rates, the Fed seeks to maintain price stability and promote sustainable economic expansion. One of the key reasons why the Federal Reserve frequently makes headlines is due to its influence on interest rates.

Changes in interest rates have a direct impact on borrowing costs for individuals and businesses alike. As a result, decisions made by the Fed during their meetings carry significant weight and can shape market expectations.

These meetings are closely watched by market participants who seek clues about future monetary policy actions or changes in economic forecasts. Furthermore, understanding the Federal Reserve is essential for individuals who want to comprehend how it affects their purchasing power and overall financial well-being.

The Fed's ability to control inflation helps preserve people's ability to buy goods and services at stable prices over time. It balances this goal with maintaining employment levels and promoting economic growth.

By striking this delicate balance through its monetary policy decisions, the Federal Reserve aims to create an environment conducive to sustainable prosperity for all Americans. While often making headlines due to its role in shaping interest rates and influencing monetary policy decisions, the Federal Reserve Bank serves as a stabilizing force in our economy.

Its primary objectives are maintaining price stability while fostering maximum employment levels and sustainable economic growth. Through its actions aimed at controlling inflation and managing interest rates, it seeks to ensure that individuals' purchasing power remains intact while supporting an environment conducive to long-term prosperity for all stakeholders involved.

Alliance America can help

Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

A mother reading a book with her daughter

Your legacy is vastly more than an amount of money left to your surviving beneficiaries. Part your legacy can be the example of a life well-lived that’s achieved through proper planning.

A senior couple stressed over tax liabilities

Too many people enter retirement with burdensome mortgages, car payments and credit-card debt that they’ve amassed during their working years. Proper management of these liabilities is fundamental to your current and future financial viability.

A daughter hugging her mother

Financial planning often is motivated by our love for our life partners, children, family members and friends.

Using a calculator to calculate taxes

Taxes have a significant impact your finances and can siphon assets unless you have a prudent approach to meet your objectives.