Thread: What exactly does the Federal Reserve do, anyway?

What exactly does the Federal Reserve do, anyway?

By Matt Krantz, USA TODAY

Q: What is the Fed and why does it have such sway on the stock market?

A: Secretive societies wielding lots of power are usually the subject of a Dan Brown novel. But there’s one such group, the Fed, that’s even more interesting to many investors.

The Board of Governors of the Federal Reserve System, or Fed for short, is one of the more mysterious and intensely important groups to the economy and investors. The six members of the board, including Chairman Ben Bernanke as well as Janet Yellen, Kevin Warsh, Elizabeth Duke, Daniel Tarullo and Sarah Bloom Raskin, hold tremendous sway over all aspects of U.S. financial life.

This group is in charge of establishing, among other things, the relative value of the U.S. currency. It can influence the value of the dollar by controlling the supply of money through various means, including so-called open market operations. By using open market operations, the Fed boosts or shrinks the money supply by buying or selling various financial instruments, including Treasury securities.

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The Fed’s moves can turn stock pickers’ financial models upside down literally overnight by changing expectations for inflation and interest rates. Interest rates are a key component to determining the value of stocks. Higher interest rates decrease the value of money to be received in the future, which by definition, puts a lid on what company’s future cash flows and profits are worth today. Given the Fed’s tremendous power, investors and economists spend an inordinate amount of time reading and re-reading every word uttered by members of the Fed trying to divine some sort of direction.

So what is the Fed? The Fed’s organization is pretty straight forward. In addition to the Board of Governors, appointed by the President for 14-year terms, there’s also a 12-member Federal Open Market Committee, which includes the typical seven people who sit on the Board of Governors. There are also 12 regional presidents who represent the regional Federal Reserve Banks across the U.S.

Where things get a little less clear is in where the Fed’s directives come from. The Fed operates independently of the U.S. government and its decisions do not have to be approved by the President or any branch of the government. The Fed, though, gets its power from Congress and must testify to Congress periodically. The government also receives any profits the Fed may earn, although making money is not the goal of the Fed.

The Fed’s mandate isn’t to make money, but rather, to “provide the nation with a safe, flexible, and stable monetary and financial system.â€

The Federal Reserve turned over it's $78.4 BILLION 2010 profit to the U.S. Treasury

Fed pays US Treasury record $78.4B last year - FoxNews.com

Jan 10, 2011 ... The Federal Reserve is paying a record $78.4 billion in earnings to the U.S. government, reflecting gains from the central bank's ...
www.foxnews.com/us/2011/01/10/fed-pays- ... rd-b-year/