WATCH | True or false: The Federal Reserve printed the cash (that's those funny pieces of paper people used to carry around) in your wallet (pre-Venmo).
If you said "false," you would be correct.
The Federal Reserve (aka the Fed, or central bank) can create money through monetary policies, but it does not print it.
It's the job of the U.S. Treasury to make American cash money -- both the folding stuff and those funny little metal disks called "change."
Joking aside, what is the Fed?
The Fed has a very tangible impact on every American's daily life. But despite playing a critical role in our economic ecosystem, not many know much about how the central bank works, what it does or why it's around.
Founded in 1913 by then President Woodrow Wilson, the Fed is the nation's central bank.
It controls the United States' money supply, sets economic policy, regulates banks and essentially makes sure everything is operating smoothly.
The Fed monitors the economy
You want the economy to run smoothly, so that there's enough cash flowing, say, for your paycheck to clear or for you to be able to pay for drinks at that cash-only wine bar.
"You could think of the Fed as somebody who monitors this car and how fast it's going, make sure that it's a safe speed and a fast speed for the terrain that it's on," Cady North, CEO and financial advisor at North Financial Advisors, told Circa.
Janet Yellen, pictured here, is the current Fed chair. The Fed has a board of governors based in Washington, D.C. There are also 12 reserve bank presidents around the country.
Interest rates near zero
The Fed is often in the news, as it is this week, because it's charged with making decisions on policies that impact our economy.
Most notably, since the 2008 recession central bankers have kept interest rates near zero to spur economic activity. Only recently have they budged a quarter percentage on those rates. On Wednesday, they left rates the same, but Yellen said they are "generally pleased" with how the economy is doing.
But what does the Fed do?
For Fed watchers, who take their cues on how the economy is really doing from the central bank, any slight moves are super intriguing.
But what does the Fed do? The central bank has two main twin mandates it oversees:
- Keep employment stable
- Keep inflation at bay
The Fed controls our money supply
"In other words, they govern interest rates and the money supply in the U.S. to foster economic growth and low unemployment and also stable prices," Dr. Ernie Goss, economics chair at Creighton University, told Circa.
In theory, when inflation is low, the economy performs better. Historically, Goss explained, this has been the case when interest rates are also low, because it pushes businesses to spend on things like hiring.
If there's not full employment, the road's going to go into disrepair.
What full employment looks like
"Think of full employment sort of as having enough workers on this road to keep it maintained so that we can keep going at a speed that makes sense for this road," North said.
"If there's not full employment, the road's going to go into disrepair and it can't move as fast as we want to."
If prices increase too much, we'll head right for a crash.
Crash theory of the economy
If you think of inflation as a measure of price stability, you can liken them to speed limit signs on the road.
"If we go too fast, we're going to get into a crash -- and you can think of it that way for the economy, too. If prices increase too much, we'll head right for a crash because no one will be able to afford goods or services," North said.
This all makes sense if you think of the Federal Reserve as the driver, the car as the economy and the road as the future. Pictured here: Cady North, in the passenger seat, makes sure Natalia Angulo-Hinkson drives right.
And if we drive downhill?
Well, North said going downhill is like a metaphor for what our economy is going through right now. ("The economy has sped up a bit and the Fed is trying to see whether it actually makes sense to slow us down.")
"The Fed's going to look at its gauges, right? They're going to take information in, gauges like the speedometer to make sure that the policies that they're putting into place are actually helping to stop the car or slow the car," she said.
Think of the Fed's policies like tools
It has the gas pedal, the brake pedal and the gas tank. The gas tank, North explains, you can look at as the money supply.
"So when you, say, increase reserve requirements for banks," she said, "that takes money out of the money supply as the banks have to hold onto more cash and they can't lend out as much to help businesses or individuals buy new things or invest in their products."
"The more you push on the accelerator, the more gas you're going to take out. It's like taking money supply stores from this car (the Fed's stores) and putting it out into the engine to sort of expand the economy, make it faster," North said.
What are ideal driving conditions?
"Later on, maybe the Fed has used all its tools up, it's used the money supply and it's going to have to park for a bit and go to a gas station and fill up the tank," North said.
When there aren't too many bumps in the road because when that happens, central bankers have to pull a lot of levers, like the gas and the brake, to smooth out the road.
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