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Secrets of the Temple: An Inside Look at the Federal Reserve

Front of the United States Federal Reserve Bank, the government agency that controls interest rates, at sunset in Washington DC in the Summer.

There was a time when you didn’t read about the Federal Reserve every time you opened a financial publication. But this era may seem like a “long time ago in a galaxy far, far away.”

From about 2009 to 2017, when inflation was low and interest rates were stable, you could go months without ever thinking about the Fed. Monthly inflation reports were largely ignored except by economists. Regular Fed meetings were considered a bit too esoteric to watch closely. But that’s all changed in recent years. The Fed seems to make
daily headlines.

We might return to a time when the financial markets are a bit less Fed-focused. But until then, learning more about how the Federal Reserve operates can help you under

“What is more, I consider everything a loss because of the surpassing worth of knowing Christ Jesus my Lord, for whose sake I have lost all things. I consider them garbage, that I may gain Christ,” Philippians 3:8

Today’s Federal Reserve system was created in 1913. It includes three key entities: the Board of Governors, 12 Federal Reserve Banks, and the Federal Open Market Committee.1

The people who framed the Federal Reserve Act rejected the concept of a single central bank. Rather, they envisioned a central banking system with three features.

The Board of Governors is accountable to Congress, and it oversees the 12 Federal Reserve Banks. Its seven members are nominated by the president and confirmed by the Senate. A full term lasts 14 years. The 12 Federal Reserve Banks are located throughout the country, and each one has its own nine-member board of directors.2

The Federal Open Market Committee (FOMC) is the part of the Fed that sets monetary policy. It’s the one you’ll see in the news because it determines short-term interest rates. The FOMC consists of 12 voting members which include the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis.1

Did You Know?3 The nation’s first central bank was created by Congress in 1791 at the urging of then-Treasury
Secretary Alexander Hamilton. But the voter backlash was heavy, and the bank’s charter wasn’t renewed when its 20-year term expired in 1811. The second bank of the United States was set up in 1816, but its charter wasn’t renewed either. In 1913, President Woodrow Wilson signed into law today’s Federal Reserve Act.

Now when you hear the phrase, “the Fed,” you’ll know that it’s a comprehensive team evaluating the economy to determine what’s next for interest rates. Because as the Fed adjusts rates, banks tend to follow, which will affect everything from mortgage rates, to credit card rates to the interest rate on automobile loans.

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