Federal Reserve Board

The Federal Reserve Board or the 'Fed' as it's known, is the U.S. central bank - the equivalent of our own Bank of England.

The US central bank is actually made up of 12 Federal Reserve Banks from across the country.

The 'Fed's' role is :

• to control the issue of bank notes
• to manage public debt and the issuing of government bonds
• to pay a key role in carrying out monetary policy by setting interest rates and advising on policy.

The tool by which the 'Fed' controls monetary policy is via movements in the 'Fed Funds' interest rate. This is the interest rate at which banks in the U.S. lend to themselves. It's a short term (day to day) rate.

It's important, but not as influential as the 'discount rate' - the equivalent of base rates in the U.K.

The sheer size of the U.S. economy traditionally means that changes in interest rates announced in Washington immediately have a knock on effect in the London financial markets as investors re-adjust to lower U.S. borrowing costs.

Clearly, if U.S. interest rates are falling, it may persuade some investors and speculators to move cash out of the dollar, in favour of the Pound, Euro etc.

Last Updated: July 2007 © Moneyextra.com

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