Discover the secrets of the US Federal Reserve and its impact on the economy.

The US Federal Reserve is the mastermind of the American and global economy, and its decisions have a direct impact on the strength of the dollar, inflation rates, job growth, and commodity prices everywhere.

In the following article, we will learn about the history of the Federal Reserve's founding, the composition of its board of directors and regional banks, and its goals of supporting the labor market, protecting financial stability, and controlling inflation.

We also review the workings of monetary policy tools, how the Federal Reserve's decisions changed the fate of markets during major crises such as the Great Depression and the global financial crisis, how the bank communicates with the public and determines investor expectations, and answers to the details of leadership appointments, decision-making processes, and the Federal Reserve's actual impact on the lives of individuals and Arab and international markets.

What is the US Federal Reserve and what is its importance? The Federal Reserve is the central bank of the United States and the world's most powerful monetary regulator. It sets monetary policies that affect the dollar, inflation, the labor market, and financial markets both domestically and internationally.

The Federal Reserve is the driving force behind the global economy, given the dollar's pivotal role in international trade and investment.

The origin and organizational structure of the Federal Reserve: How does it work? The Federal Reserve was established in 1913 after a severe financial crisis exposed the weakness of the American banking system. It was established with the aim of providing a central authority to control banking liquidity and prevent bank panics and collapses.

The system consists of a central seven-member Board of Governors, along with 12 regional Reserve Banks located throughout the United States.

The Board of Governors oversees policy and attends Federal Open Market Committee (FOMC) meetings, which decide important monetary policies.

The objectives of the US Federal Reserve The Federal Reserve seeks to achieve several main objectives:

Supporting the labor market and stimulating employment opportunities: by maintaining an active economy and reducing unemployment rates to the level possible without excessive inflation. Price stability and inflation control: By setting interest rate policies and controlling liquidity to maintain inflation within safe levels, preserving the purchasing power of the dollar and preventing price increases. Maintaining sustainable long-term interest rates: by facilitating financing for businesses and individuals at balanced interest rates that support corporate growth and investments. Supervising the integrity of the financial and banking system: by monitoring financial institutions, ensuring their ability to bear risks, and taking preventive measures when necessary. Providing and developing a secure and efficient payments system: allowing funds to move quickly and easily between institutions and individuals in the United States and around the world, through services such as Fedwire and FedNow. Transparency and communication with the public Direct communication and transparency have become pillars of the Federal Reserve's policies in recent decades. The Fed issues official statements after each meeting of its Open Market Committee and holds regular press conferences in which its chairman discusses monetary policy directions and the rationale for decisions.

The measures provide clarity to markets and citizens, calm anxiety, and guide investor expectations about the future of the economy and monetary policy.

The Federal Reserve's Monetary Policy Tools: How Do They Affect the US Economy? The US Federal Reserve has a variety of powerful tools it uses to regulate the economy and achieve its monetary objectives, the most prominent of which are:

Prime interest rate (federal funds rate) It is the Federal Reserve's most important tool, controlling the cost of borrowing for banks and, by extension, loans to individuals and businesses in the market by raising or lowering the interbank interest rate.

Raising interest rates makes loans more expensive and slows economic growth, while lowering rates stimulates borrowing and consumption.

Open market operations (buying and selling bonds) The Fed buys or sells government bonds in the open market. When it buys bonds, it injects additional liquidity into the banking system, which facilitates lending and stimulates economic activity . When it sells, it withdraws liquidity and reduces the amount of loans available to the economy.

Reserve requirements It is a percentage of banks' funds that they must keep and not lend. If the Fed raises this percentage, the volume of loans decreases, which slows the economy. When it is lowered, more liquidity is available and lending is encouraged.

Discount price It is the interest paid by a commercial bank when it borrows directly from the Federal Reserve, and it affects banks' ability to respond to any liquidity disruption or need for quick funding.

The impact of Federal Reserve decisions on interest rates and inflation The Fed's decisions regarding interest rates and liquidity have a direct and rapid impact on the economy:

When the Fed raises interest rates When the Fed raises interest rates, borrowing capacity decreases and demand for goods and services in the market decreases, which usually leads to slower or more stable price increases, thus helping to limit inflation if it is high.

At the same time, the dollar rises in value relative to other currencies because investors prefer to invest in it to benefit from higher interest rates, making US exports more expensive in global markets.

When the Fed cuts interest rates Borrowing becomes easier and the cost of financing declines across the market. This helps economic growth and consumption, but it can also lead to inflation if the economy is already robust. The dollar often declines against other currencies, thus supporting US exports.

Impact on inflation Controlling inflation is a primary goal of the Federal Reserve. If prices rise rapidly—that is, high inflation occurs—the Federal Reserve quickly raises interest rates or reduces liquidity.

If the economy faces a recession or weak demand, it tends to cut interest rates and inject liquidity to support investment and consumption.

Therefore, every decision taken by the Federal Reserve quickly impacts the US economy and international markets, and forms the basis for most central banks around the world's monetary policies.

The Federal Reserve in Crisis Response The history of the US Federal Reserve is replete with critical events that tested it as a leader of the global financial system. Perhaps the most prominent crises it faced were:

Great Depression (1930s) The crisis began with the crash of the US stock market in October 1929, which resulted in millions losing their savings and the United States entering the deepest economic recession the country had ever seen.

Unemployment rates have soared to over 25%, and a wave of bank failures has paralyzed the financial system and eroded public confidence.

The Federal Reserve was harshly criticized for its slow response and its reliance on tight monetary policy, refraining from injecting sufficient liquidity into the market and failing to support failing banks through emergency loans.

It was believed at the time that tightening monetary policy would protect the dollar from collapse, but in reality, it deepened the recession and increased the number of bankruptcies.

The lessons of this crisis changed the central view of the role of central banks, and liquidity injections and immediate intervention in crises subsequently became a priority.

Stagflation (1970s) The 1970s presented a unique challenge: sharply rising prices, high unemployment rates, and weak economic growth. The 1973 oil crisis was the trigger that doubled production costs and triggered an unprecedented wave of price increases. The economy became "stagflation," a condition in which growth declines and prices rise simultaneously.

Under the leadership of US Federal Reserve Chairman Paul Volcker, the Fed made a drastic decision in 1979-1981 to raise interest rates to historic levels exceeding 20%.

The goal was to curb inflation at any cost, but the result was a deep recession in the early 1980s, unemployment rose sharply, and loans became extremely expensive.

Over the long term, the policy succeeded in stabilizing prices, and confidence in the Fed's aggressive intervention approach to combating inflation when it reached dangerous levels was restored.

Latin American debt crisis (1980s) In the early 1980s, many Latin American countries found themselves unable to repay the massive debts they had borrowed from American and international banks. Due to rising global interest rates and weak commodity prices, American banks faced the risk of collapse due to the default of these debts.

The Federal Reserve intervened, working with the US Treasury and the International Monetary Fund, to restructure debt and provide support and liquidity programs to major banks to prevent the crisis from spreading and causing global financial turmoil.

International coordination and partnership efforts have succeeded in containing risks, restructuring the financial policies of distressed countries, and preserving the US banking system.

Dot-com bubble (2000-2001) During the 1990s, American markets witnessed a massive boom in technology and internet companies , and their stock prices soared beyond their intrinsic value.

In early 2000, the bubble began to burst and dot-com stock prices plummeted, leading to massive market losses and a decline in investments.

The Federal Reserve responded by gradually lowering interest rates to support the economy and reduce borrowing costs for businesses and consumers. This limited the effects of the recession resulting from the crisis and contributed to a gradual return to growth.

Global Financial Crisis (2008) The 2008 financial crisis was the result of a buildup of subprime mortgage risks, which exploded with the collapse of real estate prices and the failure of major US banks and financial institutions such as Lehman Brothers, followed by a global panic and a sharp decline in stock markets and the real economy. For the first time, the Federal Reserve cut interest rates to near zero and began a quantitative easing program by purchasing government bonds and financial assets to stimulate the market and inject liquidity. It also intervened to rescue major financial institutions to prevent a complete collapse of the banking system.

The measures gradually restored confidence and allowed the US economy and financial markets to return to growth in the following years, despite the subsequent controversy over the consequences of massive debt and the unequal distribution of economic gains.

COVID-19 pandemic (2020) With the outbreak of the pandemic, most economic activity came to a standstill, corporate revenues plummeted, and financial markets rapidly collapsed.

The US Federal Reserve acted swiftly, cutting interest rates to zero in just days, pumping hundreds of billions of dollars into the markets, and expanding its purchases of financial assets to provide liquidity to everyone from banks to corporations.

The moves saved the financial system from immediate collapse, helped support the US economy, and paved the way for a rapid recovery over the next two years, despite continuing inflationary challenges.

Inflation after COVID-19 (2021-present) As the economy recovers and global demand increases after the COVID-19 pandemic, a record wave of inflation has emerged due to rising prices and global supply shortages, in addition to previous rounds of liquidity injections.

The Federal Reserve responded with a policy more hawkish than at any time since the 1980s: aggressively and frequently raising interest rates to curb inflation. This helped to moderate price increases over the medium term, but it impacted economic growth and some sectors, such as real estate and technology, and posed new challenges for emerging markets and other countries pegged to the dollar.

Ben Bernanke: Leading the Fed in Times of Adversity Ben Bernanke is one of the most prominent Federal Reserve chairmen, having led the bank during one of the most difficult economic periods in American history (2006-2014), and confronted the 2008 global financial crisis.

Bernanke drew on his academic background and economic expertise, as he specialized in studying the Great Depression, which helped him make bold and quick decisions.

He adopted a zero-interest rate policy and devised unconventional quantitative easing programs to purchase financial assets from the market and inject liquidity directly into the banking system.

He also maintained constant communication with markets and the media to reassure investors, and oversaw rescue programs for major banks and financial institutions, such as the rescue of AIG and Citigroup. Bernanke's leadership was crucial in preventing a complete collapse of the American financial system, despite the controversy and questions surrounding the implications of the new policies.

The impact of the US Federal Reserve on the global economy and the dollar The Federal Reserve is the most important player in determining the value of the dollar, the leading currency in global trade . When the Fed changes interest rates or injects liquidity into the markets, the dollar is directly affected, as follows:

Raising interest rates in the US attracts financial investments towards the dollar, causing its value to rise and negatively impacting developing countries due to high debt and weak exports. Lowering interest rates or quantitative easing would result in a weaker dollar and a recovery in US exports, but it could also destabilize emerging markets that rely on dollar financing. The Federal Reserve's changes in interest rates and liquidity policies directly impact global commodity prices, such as oil and gold. Higher interest rates lead to a stronger dollar, which often leads to lower prices for gold and oil, and vice versa. The repercussions of the Federal Reserve's decisions on Arab and local markets When the US cuts interest rates, the central banks of Saudi Arabia, the UAE, and Egypt often follow suit to maintain currency stability and attract investment. A rising dollar raises the cost of imports, putting pressure on the budgets of countries that import goods and essentials, while supporting oil exports in Gulf countries. During times of liquidity injection or crisis, the real estate market, foreign investment, and stock prices in Arab countries are affected, and Arab investors directly feel the repercussions of the Federal Reserve's decisions in every new deal, loan, or project. Therefore, monitoring the US Federal Reserve remains a daily necessity for every economist and decision-maker in the Arab region.

Frequently Asked Questions about the US Federal Reserve Who are the owners of the US Federal Reserve? The Federal Reserve is not traditionally owned by individuals or private entities; rather, it consists of 12 regional reserve banks in which commercial banks hold management shares but do not have control or profit rights, and the Board of Governors is an independent government body.

Who appoints the Chairman of the US Federal Reserve and what is his term? The President of the United States appoints the Chairman of the Federal Reserve, who must be confirmed by the Senate. The President's term is four years, renewable within his full term of up to 14 years.

What is the Federal Open Market Committee and its role? It is the Federal Reserve's main monetary policy-making committee. It includes members of the Board of Governors as well as the presidents of some regional reserve banks. The committee sets interest rates and regulates bond purchases and sales to achieve monetary policy objectives.

How does the Fed make interest rate decisions? The Federal Open Market Committee holds regular meetings (usually 8 times a year), during which it discusses the economic situation and makes a collective decision to raise, lower, or hold interest rates steady, based on market, inflation, and employment data.

Is the Fed a fully governmental body? The Federal Reserve is an independent institution created by Congress and operated by special law; its Board of Governors represents the central government authority, while regional banks have a special administrative character but are subject to government oversight and are not run for profit or for traditional ownership.

In conclusion, the role of the US Federal Reserve extends beyond its role as a central bank; it is the most closely followed policymaker internationally and a link between financial stability and global economic growth . Continuous monitoring of its decisions has become a necessity for anyone seeking opportunities or avoiding risks in a changing world driven by US monetary policy.