Free Stock Training: The Federal Reserve

The stock market can often be a very confusing arena, especially if you have been allowing someone else to manage your money for you until now. When you are trying to understand how a system works, it is best to understand it’s history and underlying foundation. One such pillar is the Federal Reserve System which is the guardian of the nations money. It is a mix of a regulatory arm, controller, banker, and watch dog.

The Federal Reserve exists to help oversee the United State’s monetary policies. Split into 12 separate district banks with 25 regional branches, the Federal Reserve System spans the country. The reason the system is split like this is for checks and balances of the cities, states, and people in power.  The Fed is essentially owned by the banks and supervises banking operations. Because of it’s strong hold on the banking system and monetary policy, the Fed inevitably has a huge impact on the economy.

One interesting thing to note is that only about 50% of banks in the United States are members. All national banks are required to be members and some State banks can qualify if they meet certain financial regulatory requirements. This doesn’t mean you need to worry about your money though as the Federal Reserve is not the FDIC. The FDIC is the Federal Deposit Insurance Corporation which was setup to insure bank depositors against losses in the event of another financial crisis like the great depression.

Federal Reserve Roles:

1. Administrator - Handles the transfer of more than 15 billion transactions per year.

2. Controller - The Fed makes sure your money is fresh (takes beat up currency off the market).

3. Banker – The FED is the bank for banks. It holds the accounts for the US Treasury and other government and related arms.

4. Regulator - The Fed essentially turns the money spicket off and on to regulate how much money is ever on the market. They do this to help balance the growth of the economy and inflation. The Fed has two tools;1. Iit can adjust the rate (the rate it charges banks to borrow money) and 2. Supply.

The rate is manipulated by increasing or decreasing the discount rate. When rates are lower, banks tend to borrow more money and lend more money. The opposite is true when rates are higher – they tend to borrow less and lend less.

The Supply is manipulated with the buying or selling of government securities in the open market. If they want to increase the money supply to spur economic growth, they buy securities. If they want to decrease growth to control inflation, they sell  securities.

Regulation in not such an easy thing to do. It takes lots of studying in economics to land a job working in this ‘role’. It usually takes several months for any policy changes to affect the economy and see the results.

5. Lender- The Fed lends banks money at a ‘discount rate’ but often avoid it so they don’t appear weak which can negatively effect their growth and performance.

6. Auditor - The fed audits all of the banks that are members of the Federal Reserve System. Essentially, they make sure banks are playing by the rules and are rating loans appropriately.

7. Guardians – The Fed has a stockpile of the largest amount of Gold in the world stored in one place in New York. It equates to about 10,000 tons and the Fed handles gold exchanges between numerous countries.

When you are playing a game it is critical to know who the players are as their actions will ultimately change the playing field for you. The fed increasing or decreasing rates for example can have a profound impact on the direction of the stock market. Take the time to learn about the federal reserve and consider it an investment in your stock training so you can achieve better returns.