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The US Federal Reserve (Fed)
One of the most important institutions for the global financial market.
The US Federal Reserve, commonly known as the Fed, was established by the Federal Reserve Act in 1913. It is considered the most important central bank in the world, as its decisions impact the value of the global reserve currency, the US dollar. The Fed is structured in a federal manner and is primarily composed of twelve regional Federal Reserve Banks, representing various districts, including New York City, Philadelphia, Chicago, St. Louis, Dallas, and San Francisco. These Federal Reserve Banks are corporations.
The FOMC determines US monetary policy:
The Board of Governors of the Federal Reserve System is the supervisory body of the Federal Reserve System. Its seven members are appointed by the President of the United States for 14-year terms, subject to Senate approval. The most influential executive body of the Fed is the Federal Open Market Committee (FOMC), which includes all members of the Board of Governors, the President of the largest Federal Reserve Bank located in New York, and four other Presidents of Federal Reserve Banks. The Chairman of the Federal Open Market Committee also serves as the head of the US Federal Reserve. Since February 2018, Jerome Powell has held this position, succeeding Janet Yellen. The FOMC is responsible for making decisions regarding US monetary, currency, and interest rate policies.
Every word matters:
As the central bank of the global reserve currency, the US dollar, the Fed holds significant importance for financial markets. The meetings and statements made by its members, particularly by the head of the central bank, are events of utmost financial significance globally. From an investor’s perspective, it is essential that the US Federal Reserve, like the ECB and other major central banks, adheres to the principle that monetary policy must be predictable for all stakeholders. Therefore, as little as possible is left to chance. Planned measures, such as an interest rate hike, are announced in advance. Each word in the statements carries a specific meaning that can be precisely interpreted by experts.
Facts about the Fed:
- Members of the Board of Governors are appointed by the US President.
- However: The Fed operates independently and makes decisions on monetary policy free from political influence.
- The Fed ensures the functioning of the payment system and monitors the money supply.
- The Fed oversees commercial banks and regularly publishes a business report (Beige Book).
- Twice a year, the Fed Chairman testifies before Congress on monetary policy and the state of the economy (Humphrey-Hawkins Testimony).
Our Conclusion:
Meetings of the Fed are especially interesting for traders. They often result in significant price movements following a meeting. Not only are the specific decisions important, but also the wording of the subsequently published statements, as they provide clues for future decisions. The Fed strives to make its decisions transparent and announces them in advance.
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