 Hey everyone, this is Dan. Let's talk about the Federal Reserve Banks, aka the Fed. If you invest in stocks or own a business or plan to take out a mortgage, the decisions from the Fed can greatly impact your financial futures. I know you're busy and you don't have time to read hundreds of pages on the internet or watch a one-hour video on YouTube about the Fed. I will summarize what you need to learn in just 10 minutes. Here we go. The short name for the Federal Reserve Banks is the Fed. The Federal Reserve Banks were created in 1913 after the U.S. Congress passed the Federal Reserve Act. It was signed into law by President Woodrow Wilson. The Fed has 12 branches and they're located in Boston, New York, Philadelphia, St. Louis, etc. It works with the U.S. government and has the power to create money, set interest rates, and do other things. Technically, the Fed is not part of the U.S. government. The Federal Reserve Bank's website offers the following explanation. It says the Federal Reserve Banks are not part of the federal government, but they exist because of an act of Congress. So is the Fed private or public? The answer is both. While the Board of Governors is an independent government agency, the Federal Reserve Banks are set up like private corporations. Member Banks hold stock in the Federal Reserve Banks and earn dividends. This might sound confusing, but we just need to know what the Fed does and how it impacts our lives. The Chairman of the Fed is nominated by the President of the United States, and a nomination is required to be confirmed by the U.S. Senate with a majority vote. The Fed Chair serves a four-year term and can serve consecutive terms if nominated by the President and approved by the Senate. There are seven members for the Board of Federal Reserve Banks, and they are, in addition to the Fed Chair, also nominated by the U.S. President and confirmed by the U.S. Senate. Aside from the Fed Chair, the rest of the Board members serve staggered 14-year terms. The staggered appointments for the Federal Reserve Board members are meant to insulate the Fed from the day-to-day political pressures so that the Fed can act fairly independently and do what's best for the country in the long term. The Fed has three major tools to control how much money should be in circulation. They are the reserve requirements, the discount rate, and the open market operations. The reserve requirements are the amount of cash that banks must have in either the vaults or the closest Federal Reserve Bank. The reserve requirements are set by the Board of Governors. By requiring the banks to keep a percentage of the total money in reserve, the Fed is restricting the money in circulation in the market. The discount rate is also set by the Board of Governors. It is the interest rate charged to banks on loans they receive from the Fed. There are three types of loans. They are the primary credit, secondary credit, and seasonal credit. The open market operations are the responsibilities of FOMC, the Federal Open Market Committee. Let's talk more about FOMC. The FOMC is part of the Federal Reserve System. It is made up of 12 committee members. They are the seven members of the Board of Governors and the president of the Federal Reserve Bank of New York and four of the remaining 11 Reserve Bank presidents. Remember the 12 Federal Reserve Banks around the country? The 12 Reserve Bank presidents serve their one-year terms on the FOMC on a rotating basis. And the FOMC meets eight times a year to make important decisions. The FOMC is responsible for buying and selling securities in the open market. It is also responsible for setting the Fed funds rate. The Fed funds rate is different from the discount rate that we mentioned a minute ago. The Fed funds rate is a targeting interest rate for the banks to loan their excess reserve to each other. The discount rate, on the other hand, is the rate at which the Fed loans money to the banks. And the discount rate is typically set higher than the Fed funds rate by about one percentage point. And that's because the Fed prefers that banks borrow from each other so that they can continually monitor each other for credit risk. The FOMC meets roughly eight times a year. In recent years, the FOMC has been meeting on Tuesday and Wednesday when they do meet. The current Fed chairman, Jerome Powell, usually holds a press conference right after each FOMC meeting so that he can summarize the decisions and to answer questions from the reporters. The FOMC press conferences are watched by many Wall Street analysts and investors because if you listen carefully to what the Fed chairman says and also read the press release from an FOMC meeting, you can pick up important information that will help you get ahead of the market and make profitable investment decisions. Let's review some of the terms we talked about so far. We talked about the federal reserve system, the Fed governors, the Fed chair, the FOMC, reserve requirements, discount rate, and the Fed funds rate. With this basic knowledge, we're ready to understand how the Fed influences the economy, the stock market, and ultimately impacts our pocketbooks. How does the Fed create money? One of the chief responsibilities set out in the Federal Reserve Charter is the management of the total outstanding supply of U.S. dollar and dollar subsidy. In the old days, it had to do with printing money. The Fed decides how much money to create, and the U.S. Treasury Department then prints the paper bills or makes the metal coins. Today, most of the money in our economy is kept in electronic forms. To create more money, the Fed can do several things. The most common practice for the Fed is by U.S. Treasuries, a.k.a. U.S. Treasury Securities. These are the IOUs issued by the U.S. government. They include T-bills, T-notes, and T-bounds. For example, if the Fed wants to inject $1 billion into the economy, it can buy $1 billion worth of Treasury bonds from, say, Citibank. The money is then credited to Citibank electronically. With the money, Citibank can then lend out the money to different businesses or to home owners by way of mortgages. The Fed can also loan money to banks for the short term, or the Fed can use repurchase agreements by buying securities from the banks and keeping the securities overnight. By far, the most common practice for the Fed to increase money supply is by U.S. Treasuries from a bank. If you like what you've seen so far, I'd like to encourage you to click the like, subscribe, and notification button. That will encourage me to make more videos like this in the future. It'll also help YouTube to direct more viewers to my channel. Thank you very much. Let's continue. To understand how the Fed policies affect our pocketbooks, we have to watch for several things. First of all, it's a Fed funds rate. When the Fed increases the Fed funds rate, it drives up the interest rate for commercial loans and mortgages. That increases the cost of doing business. Therefore, when a Fed funds rate goes up, the stock market usually goes down. This is a chart of the Fed funds rate and S&P 500. The blue line is a Fed funds rate and the orange line is S&P 500 index. For example, when the Fed started to raise the Fed funds rate in April and May of 2018, S&P 500 started to go down here. It was also because of the increasing trade tension between the U.S. and China. After the S&P took almost a 30% drop, the Fed decided to stop raising interest rate, and then S&P started to recover. After that, S&P started to go horizontal again. And then the Fed decided to lower the rate, the market then started to go up. In the beginning of 2020, here, when the COVID pandemic started, S&P dropped quickly. To stimulate the economy, the Fed decided to drop the rate to almost zero. S&P then started to recover because of the near zero interest rate and because of QE, quantitative easing, which we will talk about in a minute. Let's look at another important action from the Fed, which is asset buying or quantitative easing or QE. The Fed has been buying and selling U.S. Treasury securities for many years. In 2008, because of the Great Recession, the Fed significantly increased the U.S. Treasury's abort, thereby injecting more money into the system to stimulate the economy. More money in the economy helps the businesses. It also helps the stock market move higher. When the Fed buys more U.S. Treasuries, they are recorded on its balance sheet as asset. Therefore, the term increasing Fed asset is synonymous to asset buying and quantitative easing or QE. In 2020, because of the COVID pandemic and the mandatory shutdown of schools and many businesses, the Fed initiated another round of QE. This chart shows the total Fed assets and S&P 500 index since 2019. The orange line is S&P 500 index and the blue line is the total Fed asset. When the COVID pandemic started in the U.S. in the beginning of February 2020, the S&P index dropped quickly. In addition to lowering the Fed funds rate to near zero, the Fed stepped up its asset buying and increased the balance sheet from $4 trillion to $7 trillion in just three to four months. The stock market finally started to recover. From July of 2020 to today, the Fed has been increasing its asset buying by about $120 billion a month. And that's because the Fed wants to continue to stimulate the economy to create more job opportunities for people. Once the Fed starts to slow down its asset buying, the stock market is expected to stop going up, or the market might even start to go down. One aspect of QE that many analysts fail to mention is that as the Fed buys up more U.S. Treasuries, it has a net effect of lowering the interest rates for U.S. Treasuries. Why? Because the Fed is buying a lot of U.S. Treasuries, the demand for U.S. Treasuries go up. The interest rate will then go down in the Treasury auctions. Therefore, QE is another way for the Fed to lower the interest rates. In fact, by selectively buying the two-year, 10-year and 30-year Treasuries, etc., the Fed can selectively influence interest rates for U.S. Treasuries of different maturities and thereby changing the yield curve. That's called Operation Twist, which is another tool that the Fed uses to fine tune the economy. You can read more about the yield curve and Operation Twist and other information about the Fed by checking out the links below this video. Since the Fed funds rate and Fed asset buying are both decided in the FOMC meetings, it is important to watch whether the Fed has decided to change any of these two things after each FOMC meeting. Sometimes it's important to read between the lines in those FOMC press conferences to see whether the FOMC members are thinking about increasing the Fed funds rate or thinking about tapering QE in the near future. Thank you for watching all the way here. I hope you find this video helpful and interesting. I'd like to encourage you to subscribe to both my YouTube channel and my Twitter account so that you will receive the latest updates. As usual, you can send me your comments, questions, and suggestions by way of my YouTube channel and also to my Twitter account. I'd like to remind you that I'm not a financial advisor. I share my stock trading strategies for educational purpose only. If you want to buy or sell stock, you should make your own decision and you should definitely consult with your financial advisors before you do so. Just wrap up my video for now. I will chat with you again in the next few days. In the meanwhile, I'd like to wish you the very best of luck with your financial investments.