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When it comes to central banks, none is more powerful than the United States Federal Reserve widely known as the Fed. Eight times each year, the ‘Fed’ meets to discuss monetary policy and set interest rates.  These meetings are carefully scrutinized by the financial markets. After all, the Fed’s policies have a significant impact on the financial system of the world’s largest economy and, by extension, the global market.

Federal Reserve: A Brief History

The Federal Reserve System was established by U.S. Congress nearly a century ago. It wasn’t until 1913 that the Federal Reserve Act was officially signed into law by then President Woodrow Wilson. By establishing the Fed, policymakers hoped to create a more stable and secure financial system following frequent episodes of market panic and bank failures. Since then, the Fed has been a staple of the U.S. financial system.[1]

Throughout the decades, several pieces of legislation have shaped the structure of the central bank. This included establishing the Federal Open Market Committee (FOMC) in 1935 following the Great Depression. To this day, the FOMC remains the central bank’s policymaking body.

More recently, the Fed has been influenced by the Wall Street Reform and Consumer Protection Act, which was passed into law in 2010 following the financial crisis.

Throughout its history, the Fed has served as an independent body.

How the Fed Influences Monetary Policy

From a financial market perspective, the Fed’s main influence comes via the FOMC, which is the main venue for setting monetary policy. While the Fed has many tools for influencing monetary policy, it usually does so by setting interest rates and conducting open market operations. The biggest open market operations in U.S. history was conducted after the 2008 financial crisis when the Fed purchased trillions of dollars’ worth of Treasuries and mortgage-backed securities.

When it comes to the economy and financial system, the Fed has two main objectives: to ensure price stability and support economic growth. In the present context, this means keeping inflation around 2% annually and GDP growth steady. The Fed adjusts monetary policy in response to these broader conditions.

Make no mistake – the Federal Reserve has tremendous power. Its Chairwoman, Janet Yellen, is considered to be the second-most powerful person in the United States behind only the President.[2] Therefore, the Fed should be on every investor’s watch list.

[1] Federal Reserve Bank of San Francisco. What is the Fed: History.

[2] Patrick Gillespie (14 September 2017). “Meet Janet Yellen: The most powerful woman in the world.” CNN.

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