Ever wondered what the Federal Reserve is or how the Fed funds are being used in tradings? We made this little guide so you can easily understand the basics and know what the Federal Reserve is all about.
What’s the Federal Reserve?
As you may already know, the Federal Reserve is the central bank in the US and was created by Congress in 1913. Also known as the Fed, the American central banks are independent entities.
The Fed’s decisions and policies always have a direct impact on the currency value of the USD. Therefore, these decisions or actions will affect any Forex trades you would see on a trading platform involving the US dollar. Thus, it is important to understand its complexity, at least on a surface level.
How many banks are Federal Reserve banks?
There are a total of 12 Federal Reserve Banks, each serving their own district. If you are wondering where they are located, we listed them down below:
·Boston
·New York
·Philadelphia
·Cleveland
·Richmond
·Atlanta
·Chicago
·St. Louis
·Minneapolis
·Kansas City
·Dallas
·San Francisco
What are the main goals of the Feds?
The main goal of the US central bank is to keep the overall economy healthy, or as much as possible. In other words, the Fed acts as a monetary policy authority and will try to balance the availability and cost of money and credit across all the states, including Hawaii, Puerto Rico, and the Virgin Islands.
When it was first established by Congress in 1913, Fed’s assignments were simple and divided into 2 categories:
·Improving and promoting employment to its maximum availability.
·Maintaining a low and stable inflation rate with stable prices.
What are Federal Funds?
Commonly referred to as Fed funds, the Federal Funds are excess reserves that any regulated commercial banks or financial institutions onshore would deposit in a regional Federal Reserve Bank. From there, it is possible to borrow that money to use it somewhere else where the receiving parties don’t have enough cash flow for their needs, and vice versa. These loans and transfers are usually operated overnight, thus why the federal funds rate is often called the overnight rate.
In a more simple perspective, the Fed Funds help commercial banks and financial institutions meet their daily reserve requirements. If these banks don’t have enough money from customer deposits and whatnot, then they can loan reserve money from the central bank. If they have too much money, then they can just deposit the excess to the central bank.
And that is all for today! With this mini-guide on the Fed, we hope it will help you better understand the importance of the latter and how it will affect your day-to-day decisions in Forex trading.