America's Federal Reserve System: How it Works and What it Does

If you've ever watched the bozos at CNBC or Lou Dobbs on CNN (sort of the anti-bozo), then you've no doubt heard multiple references to the Federal Reserve System. But do you really know what the Federal Reserve System is and why it exists and how it affects your life? The Federal Reserve System was created by the US Congress under the Federal Reserve Act in 1913 in order to establish a more solid foundation for the economic policies of the country that would potentially forestall the kinds of monetary crises that had afflicted America during the preceding decades. The concept behind the creation of the Federal Reserve was to establish an agency that would set and maintain monetary policy in the US by influencing monetary conditions.

Responsibility for establishing monetary policy is in the hands of the Federal Open Market Committee (FOMC). The FOMC is made up of the seven Federal Reserve Board members along with five of the twelve Federal Reserve Bank chairmen. It is the job of the FOMC to meet throughout the year-usually no more than eight times-to analyze the current state of the US economy and prepare monetary policies in response.