AS YOU ARE watching the news, you might hear references to the Fed. For example, the Fed has indicated that there will be no more rate increases this year. You might be wondering: “what is the Fed and how does it do what it does?”

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The Federal Reserve, or the Fed, was established in 1913. It is the central bank of the United States. It has four main responsibilities:

• Steer the nation’s monetary policy. It influences money and credit environments with the goal of full employment and stable prices.

• Supervise and regulate banks and other financial institutions. The goal here is the safety and dependability of the nation’s banking system. It also steps in to protect the credit rights of consumers.

• Maintain the stability of the financial system. It manages the systemic risks that may arise in the financial markets.

• Provide certain financial services to the U.S. government, financial institutions, and foreign official institutions.

With such a large set of duties, how is the Federal Reserve able to handle these tasks? It is composed of three major bodies: the Board of Governors (also known as the Federal Reserve Board), Federal Reserve Banks, and the Federal Open Market Committee.

The Board of Governors includes seven people. Each person has been nominated by the President and approved by the Senate. The position has an appointment of a 14-year term. Official business is conducted in Washington, D.C. and is headed by a chair.

There are 12 regional Federal Reserve Banks that are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. These banks are responsible for day-to-day bank functions.

The Federal Open Market Committee (FOMC) is responsible for setting U.S. monetary policy. It is composed of the Board of Governors and the 12 regional bank presidents. The FOMC usually meets eight times per year. The committee produces meeting notes that often make headlines because the notes reveal insight regarding the Fed’s stance on monetary policy.

Now that we have examined the Fed’s structure, let’s look at a few of its duties. The Fed sets the federal funds target rate. This is the interest rate that banks charge each other for overnight loans. This rate is important as it becomes the yardstick for the short-term interest rates payable on various assets such as savings accounts, money markets, and short-term bonds. It is through the federal funds target rate that economic growth can be shaped.

If the Fed feels the economy needs to be stimulated, it lowers the target rate. The assumption is that with low interest rates, consumers will borrow more and spend. Lower interest rates can reduce the value of the dollar against other currencies. The result is more expensive foreign goods. Consumers may be inclined to buy the less expensive American goods instead. The hope is that all this spending will increase employment and wages, as people are needed to make the goods and provide services to each other.

The opposite situation can also happen. Consumer prices can increase. This is when inflation rears its ugly head. In this case, the Fed will raise the target rate, making it more costly to borrow. Loans become more expensive. This slows economic growth but helps curb inflation.

The Fed is good at giving clues as to the direction that interest rates are headed. Members give speeches, research, and testify about the economy. All of this can provide insight as to where the economy might be headed. Consumers may find that knowing how the Fed feels is helpful when making borrowing and investment decisions.

Marc A. Hebert, MS, CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at Your question and his response might appear in a future column.