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by Hillary Patin

How the Federal Reserve Affects You

You might not always be thinking of them, but they’re always thinking about you: the Federal Reserve, the United States’ central bank. The Fed has many jobs that affect you, so what exactly do they do? And who are they?
Federal Reserve wallpaper

You might not always be thinking of them, but they’re always thinking about you: the Federal Reserve, otherwise known as The Fed. The Fed is the United States’ central bank, arguably the most powerful financial institution in the world. The Fed has many jobs that affect your everyday life, including keeping employment high, prices stable, and long-term interest rates in check. The Fed is also in charge of supervising and regulating banks to protect the U.S. banking system and its consumers.

So what exactly do they do? And, perhaps another important question to ask—who are they?

To raise or not to raise

News media often speculates whether the Fed is going to raise or lower interest rates in response to the economy and job growth, keeping us consumers on our toes. When the Fed changes interest rates, the effect ripples outward to banks, which in turn affect the entire economy. Higher interest rates from the Fed mean higher mortgage, car loan, and credit card rates as well as slower consumer spending, home sales, and borrowing. Lowering interest rates does the reverse, favoring borrowers over lenders. As you can see, changing the interest rates can have a large effect on the economy, and on you. So who is calling the shots?

Behind the scenes of the Federal Reserve Banks

While we often hear about the Federal Reserve chairperson (think: Janet Yellen and Ben Bernanke most recently), there are many more people—and institutions—involved in the Fed. For instance, there are 12 regional Federal Reserve Banks located in major cities across the U.S., each of which has its own nine-member board of directors. Three directors are chosen by another branch in the Fed, the presidentially appointed Board of Governors. The other six directors are elected by numerous “member banks,” or private banks that hold stock in their local Federal Reserve Bank. Yes, you read that correctly: Private member banks elect directors to the Federal Reserve Banks, which are responsible for regulating private member banks. The Federal Reserve Banks are also responsible for setting the discount rate for banks upon approval from another Fed branch, which influences overall interest rates for consumers.

On the one hand, this is no surprise, given how the Fed was set up in 1913. While some wanted the central bank to be a public bank–a bank owned and controlled by the government–the nation’s bankers were concerned about the potential effects of government intervention on their banks. What came out of this disagreement was a compromise: The Fed is part private, part public, partly centralized, partly decentralized. It’s a balance between private banking interests and the government’s economic interests.

Status quo challenged

However, private banks’ role in the Federal Reserve was challenged in 2011 by Congress’ Government Accountability Office. Its audit of the Fed cites numerous conflicts of interest, many around the time of the 2008 Great Recession. For instance, in 2008, Stephen Friedman broke the Fed’s rules: He was the chairman of the New York Fed and he was on the Goldman Sachs board of directors and owned Goldman Sachs stock. Other corporate affiliations with Fed directors in the past have included General Electric, JPMorgan Chase & Co., Citigroup, and Lehman Brothers, giving cause for concern. As Senator Bernie Sanders, whose office released the audit, succinctly said, “Not only do they run the banks, they run the institutions that regulate the banks.” The Government Accountability Office’s goal is to restructure the Fed so that those in the banking industry are not in charge of choosing Federal Reserve Bank directors.

A later report on the Fed found that at least 18 current and former directors of the Federal Reserve Banks collected over $4 trillion in low-interest loans from the Fed for the large banks and corporations that they worked for. Meanwhile, small businesses and individuals were unable to get similarly low rates on loans, implying a conflict of interest.

Ben Bernanke, the chair of the Fed at the time of the audit and report, gave Congress a letter explaining that bankers provide banking expertise for the boards as decided in 1913 when the Fed’s structure was created. While it’s likely bankers bring useful knowledge to the boards of the Fed as was acknowledged in 1913, it’s questionable whether active bankers on the Fed can ever serve without a conflict of interest.

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