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The Federal Reserve of the United States is a financial entity that is in charge of all the organization and maintenance related to the economic infrastructure of the United States.
Between its many jobs, it manages the supply of U.S. currency, which is the USD or United States Dollar.
The main governing body of the Fed is the Federal Open Market Committee. The committee holds eight meetings per year to assess the economy and decide on monetary policy. Twelve regional Federal Reserve Banks spread across the country to control every region and many smaller affiliated entities.
What is its influence?
Like other central banks, the Federal Reserve controls and manages the short and long-term interest rates of the U.S. economy. It also has the power to raise or lower the flow of the currency through the country. When it is necessary, the Fed is in charge of printing more paper money to enter circulation. At the same time, it can also destroy unnecessary cash and decrease the money supply.
Understanding the Fed and its purpose
The Federal Reserve was founded in 1913 by the U.S. Congress, as a way to create an administration system of the wealth of the country, and stable currency to commerce with other countries. It implements and monitors the monetary policy in the country, allowing the growth of employment and stable prices.
The Fed keeps a balance on the financial markets and the economy. It administrates the interest rates to prevent inflation or deflation by lowering or raising interest rates. It also gives financial services to different institutions to promote the economic growth of the nation, including the U.S. Government.
What are its functions?
The Fed has the function of managing the economy of the country by controlling the interest rates. Depending on the situation, its actions can strengthen the USD currency, which leads to increased demand for Dollars and more investors will convert foreign currency into USD. In other cases, the Fed can lower interest rates to make it more affordable for foreign investors to buy in US assets.
The Federal Open Market Committee
The Federal Open Market Committee, or FOMC, is the legal representant of the Fed, and its members are the ones that create the different regulations and policies of the central bank. The US Federal Reserve has a dual mandate of ensuring employment is at maximum levels, control the highs, and keeping prices stable by targeting an annual inflation rate of 2%.
How does it impact the market and the USD?
The decisions on monetary policy and regulations imposed by the FOMC have a direct or indirect impact on financial markets not just in the US but on a global scale also. The actions that the Fed takes will have short-term consequences in the rise and lows of bonds, mortgage, stocks, and many other assets.
Investors and traders, especially those who focus on the Forex market, should pay attention to the changes and decisions that the FOMC announces. That way, they will be able to predict how the market is going to change in the following months. It can also indicate if the USD will stay stable or if its value will be swinging.
