Role of the Federal Reserve System in the Economy



We recently talked about the inversion of the yield curve and how can that lead to a recession as investors expect the Federal Reserve System to raise interest rates. The Fed today plays a very important role in the economy and based on their actions we have recessions and expansions.


The Federal Reserve System is very different from most Central Banks. Most Central Banks are owned by governments. The Fed is owned by the member banks with the governors appointed by the government. The Fed is also not one central bank but a system of 12 regional banks.


The function of the Fed is also different from other central banks as it has a dual mandate, keep inflation low and keep the unemployment rate low. They do that with the help of the Federal Fund Rate, commonly known as the interest rate.


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