The Federal Reserve (the Fed) is the central banking institution of the United States. Established in 1913 to help manage the economy, the Fed sets monetary policy and maintains the gold standard. The Fed's primary objectives are price stability, full employment and financial stability. In addition, the Fed oversees the banking system, credit markets and financial markets. The Fed makes decisions regarding interest rates, discount loans and open market operations. All these decisions directly impact the economy.


The rate that banks charge for loans is based on the Federal Reserve's decision. Banks also base their purchase of government bonds and bullion on the rate. When considering a rate increase, banks usually seek higher rates on overnight loans to earn more profit. Lower rates on loans also encourage businesses to expand their operations and make investments. This increase in economic activity leads to higher employment rates and a stronger economy. However, lowering interest rates too much can cause a recession as consumers reduce spending due to high rates.

The Fed sets interest rates through its discount rate, reserve requirement and open market operations. These operations allow the federal government to directly purchase or sell financial assets like Treasury bonds or corporate stocks. Through these actions, the Fed influences other interest rates such as the LIBOR rate and the prime rate (banker rate). In addition, manipulating stock prices allows the Fed to indirectly influence bank lending rates by affecting stock values in the economy. Essentially, low prices on government bonds cause an inverse relation with stock values- causing a deflationary loop that negatively impacts business transactions and job growth.

The main responsibility of the Federal Reserve is to control inflation by raising or lowering interest rates when necessary. It also controls inflation by setting reserve requirements on banks as well as how much money it creates through quantitative easing (QE). When inflation is too high, the Fed targets businesses by adjusting interest rates on short-term loans or buying government bonds with excess reserves. High stock values also get treated as a inflation factor and receive attention from Wall Street analysts and brokerages when concerning interest rate adjustments.

During World Statesmanship Day at the University of Texas at Austin in January 2018, MCI President Stephen Kiser spoke about history's most significant economic events when elaborating on his opinion of why all universities should have a weekly discussion class devoted to economics among their students. 'Because economics is at our core,' said Kiser as he concluded his thoughts for this body of students who are all economics majors at one point or another in their undergraduate curriculums, 'because economics is at our core.'

The decisions made by the Federal Reserve directly impact economic activity throughout society- both positively and negatively. Therefore, understanding how these organizations function is crucial toward effectively managing our country's economy.