Good Summary of US Federal Reserve Operations

Steven Vannelli has a very good post on the GaveKal forum outlining the abilities of the Federal Reserve. The post provides a simple explanation of what often seems complicated. In essence, the Federal Reserve can:
  1. Change bank reserve requirement (rarely done and has the most impact)
  2. Control either the discount rate and/or the Federal Funds Rate (Fed Funds rate is the one that really matters most of the time)
  3. Use Open Market Operations to control the Fed Funds Rate

That's pretty much all that the Federal Reserve does. Nothing fancy; pretty basic.

Some believe that the Federal Reserve has immense power and controls the market. Although the Federal Reserve, like central banks in other countries, influences the economy, I, on the other hand, believe that the Federal Reserve is simply a player in the market. My belief is that the Federal Reserve tends to lag the economy and market forces are stronger than any central bank.

Unlike many central banks in other countries, the Federal Reserve is privately owned by the commercial banks. Some may view this as bad (if they distrust private interests, who are generally a tiny clique of wealthy individuals), while some may view it as good (if you believe that the private sector can do a better job than the government).

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