What is the Federal Reserve System? What You Should Know

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.