Who runs it (the Fed, banks and government)
This is my understanding, for education. Not personal financial advice.
The Fed isn't a private company. It's weirder than that.
If money is created by lending (Chapter 1), the next question is who sets the rules for lending. In the US, that's the Federal Reserve.
What the Fed actually is
People argue about whether the Fed is public or private. The honest answer is: both, on purpose. - The Board of Governors in Washington is a federal government agency. Seven governors, nominated by the President and confirmed by the Senate, for 14-year terms. The chair serves 4-year terms (Federal Reserve). - Twelve regional Federal Reserve Banks (New York, Chicago, San Francisco and so on) are structured like corporations. Commercial banks that are members must buy stock in them. That stock can't be sold or traded and pays a capped dividend. Member banks elect some of each regional bank's directors. - The FOMC, the committee that sets interest rates, is the 7 governors plus 5 regional bank presidents.
So "bankers and government steering money together" is a fair description. "The Fed is a private company that makes profits for its owners" isn't. When the Fed makes a profit, the law sends the excess to the US Treasury. Since late 2022 it's been running losses (it pays more interest on reserves than it earns on its bonds), so those payments are paused until it catches up (Federal Reserve).
What the Fed is told to do
Congress gave the Fed a dual mandate: maximum employment and stable prices. The Fed defines stable prices as 2% inflation a year, not zero (Federal Reserve). Read that again: the official goal is for your dollars to lose about 2% of their buying power every year. At 2%, prices double about every 36 years.
How it pulls the levers
- Interest rates. The FOMC sets a target for the federal funds rate, the rate banks charge each other overnight. It steers that rate mainly by paying banks interest on the reserves they keep at the Fed. Every other rate, from mortgages to car loans, moves off this one.
- Buying and selling bonds. In 2008 and 2020 the Fed bought trillions of dollars of Treasury and mortgage bonds with newly created reserves (quantitative easing). Its balance sheet went from under $1 trillion in 2007 to about $9 trillion in 2022 (FRED, Fed total assets).
- Emergency lending. In crises (2008, 2020, the 2023 regional bank failures) it lends to banks and markets to stop panics.
Why banks and government are in the same room
- The Fed supervises big banks and pays them interest on reserves.
- The government borrows by selling Treasury bonds. Low rates make that debt cheaper, and Fed bond-buying supports those prices.
- When the system breaks, banks get rescued first. Savers get inflation later.
That's not a secret conspiracy; it's in the Fed's own documents. But it explains why the system tends to favor people with debt, assets and access over people with cash.
What it means for you
- Rates down usually means stocks and real estate up, and savings yields down.
- Rates up usually means pressure on stock prices, especially growth stocks.
- Watch the 8 FOMC meetings a year. Our daily news will flag them.
Common questions
Can the President fire the Fed chair? The law protects governors from removal except "for cause." How far that goes is being argued in court and in Washington right now.
Does the Fed print physical cash? The Treasury's Bureau of Engraving prints it; the Fed orders it and puts it into circulation.
The Fed sets the price of money, and banks and government sit closest to the tap.
Sources
- Fed structure: https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm
- Remittances/profits FAQ: https://www.federalreserve.gov/faqs/about_12799.htm
- 2% target: https://www.federalreserve.gov/faqs/economy_14400.htm
- Fed balance sheet: https://fred.stlouisfed.org/series/WALCL
