It is the central bank of the United States. It controls the amount of currency within the economy via open market operations, inter-bank loan rates (Discount Rate), and the banking reserve requirements. All of these things control how much currency each member bank can lend out. This controls the inflation rate, the strength of the US dollar, the willingness of people to spend, the willingness of people to save money, and the willingness of people to borrow money.
Open Market Operations
The Federal Reserve buys and sells securities from the various banks (member banks) around the United States. If they buy securities from the banks, each bank thus has more cash and thus there is more currency in the economy. If they sell securities to the banks, each bank thus has less cash and there is less currency in the economy.
This is the interest rate the Federal Reserve charges various member banks when the Federal Reserve lends them money. The higher the Discount Rate, the less currency each member bank will be able to lend out.
Banking Reserve Requirements
The United States utilizes Fractional Reserve Banking. That means for every dollar that a member bank has in their vault, they can lend out more than a dollar. Depending on the size of the member bank, the reserve requirement ranges from 0-10% of liabilities. Essentially large member banks (more than $71 million net transactions) only need to physically back 10% of what they lend out. For example: if they have 1 dollar in their vault, they can lend out 10 dollars. The Federal Reserve can lower that reserve requirement. That means the member banks will lend out more money. If the Federal Reserve raises the reserve requirement, the member banks will lend out less money.
|Rate||Assets Under Management|
|1.00%||Between $125,000 and $750,000|
|.85%||Between $750,000 and $1,250,000|
|.80%||Between $1,250,000 and $1,750,000|
|.75%||Between $1,750,000 and $2,500,000|
|.70%||Between $2,500,000 and $3,250,000|
|.65%||Between $3,250,000 and $4,250,000|
A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.
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Questions for the comments
Did my explanation make sense? Do you agree or disagree with what I said?