US Federal Reserve

0:00- [Narrator] Let's do a deep dive into the US Federal Reserve, and to help us there, I got this diagram from the US Federal Reserve's website, and we're just gonna go block by block and make sure we understand what's going on. So at the highest level, you have the Federal Reserve System, which really encapsulates everything that I'm about to describe in this video.

0:20People would call that the Central Bank. And that is broken down into three key entities as this diagram says. You have the Federal Reserve Board of Governors. These are seven folks who are appointed by the President of the United States and confirmed by the Senate, who collectively govern everything else that we are seeing here.

0:43They have 14 year terms, which is a longer term than most political offices. So you could imagine that they're intended to not get caught up into politics. Now, we often talk about the Federal Reserve as a quasi government or a quasi independent institution. Quasi means kind of independent, kind of government.

1:03And even though it is for the most part intended to be non-political and not part of the government, the fact that the president appoints these seven reserve, these seven Board of Governors implies that there is a connection. And the President also appoints a chairman and a vice chairman.

1:20So picks from this seven to take to have a chairman who has a four year term. So you have a chairman and a vice chairman. So there is a linkage between the government and the Federal Reserve here. Now, above and beyond this Board of Governors, you have 12 regional Federal Reserve banks, and I have a map of them here.

1:41You could see there's one in San Francisco that is meant there to be the regional bank for all the members, the regional Federal Reserve Bank for all the member banks in this region in Orange. You have one in Minneapolis, Kansas City, Dallas, Atlanta, St. Louis, Richmond, Cleveland, Chicago, and then Washington, Philadelphia, New York, and Boston.

2:00And they get a little quenched up there, but you could see them. And so as I mentioned, those banks are there to deal with or those regional, those 12 Federal Reserve banks are there to serve the banks in that region. And then a combination of the seven Federal Reserve Board of Governors plus five of the presidents of these Federal Reserve Regional banks form the Federal Open Market Committee.

2:26You'll often see it abbreviated as FOMC. And these are the folks who actually enact monetary policy. And we'll talk more about that in a little bit. So the little bit is here, what are those functions? So as I just said, conducting the nation's monetary policy, which is driven primarily by the open market committee here.

2:46So this is things like deciding on interest rates, interest rates, especially short term interest rates, setting the target interest rates, or the rates at which banks can borrow from the Federal Reserve as a lender of last resort. We could be talking about the money supply.

3:05Let me write it over here. Money supply, just how much money, at least base money, and there's other videos that go into much more detail there, should be in circulation. Once again, these are part of the Federal Open Market Committee. Now, another role is helping maintain the stability of the financial system.

3:24So the Federal Reserve was created in 1913, but some of you might know, 1929, major stock crash. We had a run on banks. 1930s was a very tough time. The Great Depression and people realized by 1935 that you had to do a major overhaul of the Federal Reserve. And one of its roles is to help ensure stability.

3:45So these are things like providing deposit insurance to banks so that even if a bank were to go out of business, that's actually insurance to their clients of the bank. So if the bank were to go out of business, that those clients up to a limit could still get their money back.

3:59So people don't have to have a panic that there is a lender of last resort. And also it's a little bit of a quid pro quo. "Hey, we're gonna help insure you, but we're also going to make sure that there are regulations around how much capital you need to do." What type of things are you allowed to do with other people's money and what that kind of things are you not allowed to do.

4:17And so that is another role. Now, as you can imagine, the whole financial system has a lot of machinery behind the scenes. A lot of technology these days about how money can get transferred and how one entity can pay another entity. And if they were to transfer it, how do you make sure that everything is good in the books?

4:35That's what settlement means. That it's done safely, that hackers can't get into it and it's done efficiently, that it doesn't take days and take a lot of resources. That is also the job of the Federal Reserve. And then last but not least, promoting consumer protection and community development.

4:51This is making sure that people know what their rights are, that people have financial literacy. I'd argue that's probably why they created a diagram like this that I was able to use for this video. That they're trying to just make sure that there's overall health and overall health in the financial system isn't just about the banks being healthy, but it's also about people understanding the system and understanding how it can work in their favor.