What is the Federal Reserve?

In Short

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.

Discount Rate

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.

Fee Structure

Rate Assets Under Management
1.44% Below $125,000
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
.60% Above $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.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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