The role of the US Federal Reserve

The role of the US Federal Reserve

The US Federal Reserve, or the Fed as many call it, is the central US bank. Its purpose, like that of any central bank, is to help keep the economy of its country stable. As such, every move they make is worth keeping an eye on. Everything they do tends to end up on news headlines because of this. This is doubly true for the Fed as it is part of the largest economy in the world. So, what does the Fed really do in practical terms?

Keeping a handle on inflation

The main job the Fed has to do tends to be to keep inflation under control. They thus manage credit, which is a large portion of the money supply. They can print money if need be, and control interest rates in the market.

There are several ways that it may need to manage inflation though.

Expansionary methods

When the economy is tanking or just struggling generally, the Fed can help boost it. Through their methods, they can lower interest rates. This means people will find it easier to take out loans, as they are cheaper. This increases the liquidity and investment in businesses and hopefully helping the economy grow. The growth of employment is the desirable result of this.

It’s possible that their policies overshoot and causes too much growth. In this case, the economy needs a contraction.

Contractionary methods

When the economy grows too quickly, it can be a problem. Things quickly grow out of hand, and an even worse downfall may be up ahead. Therefore, the Fed wants sustainable growth of a reasonable speed. This is why the Fed is likely to raise interest rates for loans in such a situation.

This has the result of slowing down growth as people are less likely to borrow. Investment slows down, and businesses stop raising their prices.

 

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