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What is the Federal Reserve? Pros and Cons

What exactly does the central bank do, and does it help or hurt Americans?

The Federal Reserve has recently taken over the news cycle. But since the institution does not enter family conversations around the dinner table all that much, the key question is: What is the Federal Reserve?

In response to the Panic of 1907 – a three-week banking crisis that saw the New York Stock Exchange collapse by 50%, bankruptcies across the country, and decline in market cash. Congress established the Federal Reserve System. Proposed by government officials, banking interests, and academics, President Woodrow Wilson signed the Federal Reserve Act into law on December 23, 1913, hoping to provide the United States with a stable, secure, and adaptable financial and monetary system.

Lawmakers gave the Federal Reserve (also known as the Fed) three mandates: Maximize employment, stabilize prices, and moderate long-term interest rates. It has since grown, now regulating finance, supervising large and small banks, and extending financial services to the federal government, and some financial institutions.

The Fed is comprised of a central body – the Board of Governors in Washington, DC – and 12 regional Federal Reserve Banks that take care of their geographic areas:

  • Atlanta
  • Boston
  • Chicago
  • Cleveland
  • Dallas
  • Kansas City
  • Minneapolis
  • New York
  • Philadelphia
  • Richmond
  • San Francisco
  • Louis

Considered the most powerful financial institution in the world, the Fed is independent of the US government because its policies do not need to be approved by Congress or the president.

Pros of the Central Bank

Should financial strife inflict the world’s largest economy, then it is the Fed’s job to ensure that banks can weather the storm. It performs stress tests to help determine whether a bank has enough money to handle adverse economic changes.

The Fed has kept overall prices in check since the mid-1980s.

The Fed also allowed the US dollar to become one of the most reliable currencies around the world, so that it became accepted almost anywhere.

Cons of the Federal Reserve

Fed policy enables banks and financial institutions to take big risks because they are protected from consequences. During the 2008 economic meltdown, the Fed bailed out the big banks – at home and abroad – to the tune of trillions of dollars. By doing this, it showed that major financial institutions can take on enormous gambles and be shielded from bad investment decisions.

Since the Fed does not need approval from elected officials for anything it does, the institution is accountable to no one. Because of this, people worry about transparency. It is true that Fed officials routinely publish documents, report to the House and Senate twice a year, and deliver speeches. The open secret in Washington, however, is that Congress is powerless to offer any real oversight. This has spawned fears that the central bank might be operating in secrecy, which is why there has been a bipartisan push in recent years to audit the Federal Reserve.

Andrew Moran

Economics Correspondent at LibertyNation.com and LNGenZ.com. Andrew has written extensively on economics, business, and political subjects for the last decade. He also writes about economics at Economic Collapse News and commodities at EarnForex.com. He is the author of “The War on Cash.” You can learn more at AndrewMoran.net.

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