What is the Federal Reserve System? What You Should Know

Interest rate hikes are a hot topic these days. When the Fed adjusts interest rates, it touches almost every part of the economy. Two interest rate hikes have already happened in 2022 and it’s predicted that there may be several more.

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You may be aware of the recent hikes but what do you know about the government institution that oversees the economy?  A March 2021 poll by Axios® showed that most Americans know next to nothing about the Federal Reserve (Fed).

Entrepreneurs should pay attention to interest rate fluctuations to determine how it might impact their business. Here’s some information you should know about the Fed.

What is the Federal Reserve System? (“Fed”)

The Fed is the central bank of the U.S. and has been around for over a century. The Fed supervises the nation's largest banks, conducts monetary policy and provides financial services to the U.S. government. It also promotes the stability of the financial system.

Why was the Federal Reserve System created?

The Panic of 1907 spurred President Woodrow Wilson to create the Federal Reserve System. He called for a National Monetary Commission to evaluate the best response to prevent ongoing financial panics, bank failures and business bankruptcies. Congress then passed the Federal Reserve Act of 1913.1.

How does the Federal Reserve System work?

The Board of Governors of the Federal Reserve System has seven members nominated by the President and confirmed by the Senate. The Chairman and the Vice Chairman of the Board are named by the President from among the members and are confirmed by the Senate. They serve a term of four years.

The Fed supervises and regulates banks and other important financial institutions. The goal is to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers. The Fed helps to maintain the stability of the financial system and mitigate any systemic risk that may arise in financial markets.

What does the Federal Reserve do?

This important entity has the following responsibilities outlined on their website:

  • Manage inflation
    This is the Fed's most high-profile function and important in 2022 as the cost of goods and services continue to rise.
    Investopedia reports that inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. A surge in demand for products and services can also cause inflation as consumers are willing to pay more for the product.
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  • Supervise the banking system
    The Fed supervises and regulates the nation’s largest banks and enacts laws to protect consumers.
    The Fed, through the Board of Governors, sets standards of operation for banks through policy guidelines and interpretations of relevant laws. Sometimes regulations are restrictive, meaning they limit a bank's activities.
  • Maintain the stability of the financial system
    The Fed maintains the stability of the financial markets to help avoid potential crises.
    The Fed provides services to other banks, the U.S. government, and foreign banks.

How does the Fed affect small businesses?

Small businesses across America are being impacted by rising inflation, supply chain disruptions and the worker shortage crisis. Inflation is hitting small businesses especially hard.

Inflation is, by far, the top concern for small businesses in Q1 2022, according to a recent survey conducted by the U.S. Chamber of Commerce. To cope with inflation, 67% of small businesses have raised prices, according to the study. Another four in ten (41%) report having decreased staff or taken out a loan in the past year (39%) in response to growing inflation pressures.

Final thoughts

If your small business is in need of funding, now is a great time to apply before rates rise again. Start an application and we’ll run a soft credit inquiry that will not affect your credit score.* Our team of financial professionals can help you understand the funding options that might be available for your unique business.

Visit the SmartBiz® Small Business Blog for information on credit, financing, marketing, technology and more.

*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

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