We all know of the three branches of government the Executive, Legislative and Judicial Estates; then there is what is commonly know as the fourth estate the Press. So I am calling the Federal Reserve system the fifth estate.
The Federal Reserve is a branch of the government that was established in 1913 to ward of financial crisis like we experienced in the 1880's, 1929 and 2008. While I am not going to go into every detailed part of the Federal Reserve in this article if you want that you can go to Wikipedia and all the information will be provided. What I am trying to achieve by writing this is that you see how the Federal Reserve effects your life on a daily or semi daily basis with out you even knowing it.
Here are some basics, the Federal Reserve sets monetary policy by controlling interest rates, maximizing employment and ensuring for the stability of prices. We are going to be focusing on monetary policy for the most part in this article. This is a government agency; but is supported by privatly owned commercial banks. The Federal Reserve system is made up of 12 regional banks, the most commonly know would be the Denver, Philadelphia, and San Fransisco branches since you can see them on the U.S. Penny marked with D for Denver or an S for San Francisco, or nothing for Philadelphia.
William this does not affect my daily life whatsoever, could you get on by telling me about stocks this is boring?
Hold on, I am laying some ground work so you understand. Jump right in then, do you wonder why when you make a purchase on a Friday at 6pm it doesn't clear your bank until Tuesday? That's because the transaction goes through a clearing house usually the Federal Reserve so you make that online purchase in Los Angeles and are waiting for it to arrive in Denver. Chances are it is going through the Federal Reserve in both San Fransisco and then Denver then to your bank. I know this must seem pretty silly why not just have it go from the sellers bank at Bank of America in Los Angeles to your Bank; Bank of the West in Denver? The reason the clearing house system is there is because of the financial crisis's we spoke of, especially in the 1920's. Many banks lend out most of the money they bring in that you have as savings, if too many people go grab the savings and cash out the bank no longer has enough cash to meet its obligations because it is tied up in other peoples mortgages etc, so not all banks want to deal or trust in a bank that might be in financial crisis like many; including Bank of America back in 2008 so in order for your debit or check to be honored it passes through the Federal Reserve who insures the obligation will be paid. So what happens if the bank can't pay? The Federal Reserve goes to the private commercial banks and loans the money to the bank that just had a run. This happens all the time it is only in a crisis that when a run happens on many banks at once does this become an issue. It's like our own bank account, usually we have funds there, and we pay our bills on time but every so often that muffler needs to be replaced or a filing cracks and wham we are short of funds, in those cases we bail out with our credit cards.
Another way the Federal Reserve effects your life on a daily basis is when they raise or lower interest rates in order to ensure that the flow of money in the economy and control inflation and deflation which can cause a crisis to you as well. Don't believe me? You are experiencing inflation as we speak this weeekend with the increase in the price of gas at the pump, you will spend on average $50 more this weekend than you did on Memorial Day weekend last year, that's inflation!
The reason I decided to write this article on the Federal Reserve is because I heard they are going to raise interest rates again. This has a direct effect on the Stock Market and even more so the Bond Market. You can look at the raise in interest rates as a good thing and a bad thing depending on your current life situation. If you are 60 years old have no debt, won't listen to my advise and keep all your money in a savings account then this is good news because banks can afford to raise the interest rate on those accounts as a way to compete to gain your business. If on the other hand you have bad credit and want to buy a home or a car you will be paying a higher interest rate to obtain the item.
The stock market did not really react to this news they were already antisipating it so from the markets perspective the news is already factored in as a part of the overall economic picture. The Fedral Reserve can make this decison with out interferance from the other branches of government another reason I consider it a fifth state. In my own opinion interest rates have been to low for too long, I am actually glad to see the increase. The increase can have an incentive for the American public to save; that is something they have gotten out of the habit of doing for the last 30 years.
I work in an industry where I hear people say on a daily basis "I am on a fixed income, I'm only living on Social Security" they no longer can meet their financial obligations do to inflation and the ever increasing cost of goods and services. As I stated with gas prices the increase will ripple through the economy in the next 8-12 months and be even worse. The Federal Reserve feels the increase in the interest rate is warranted to actually slow down the economy and the transfer of all those goods and services, over time that will help increase the gas supply and decrease the demand for products lowering the overall cost of the item. This is how they stabilize prices.
Many conspiracy theorists will tell you how much the Federal Reserve is out to get you, implying that it is the World Bank (which is a privately held corporation), but that is a whole other article. Rich Billionaire Republicans will tell you control of the free market is an abomination and must be stopped we have to be free of all these rules and regulations that keep business out of the country. Again false; Republicans don't understand Economics (see previous articles).
For over 100 years the Federal Reserve has been at work creating monetary policy to avoid the crisis that would cause runaway inflation and financial crisis to your pocket book and ensuring that it is easy for you to obtain a job. I do not agree they are out to get you; I feel they are a required part of our everyday lives; if you don't agree with me you can always leave a comment below and I will respond to see if you wanna by my eggs for $24 a dozen!