The Fed: Who Knew?

I confess: I haven't given too much thought to the Federal Reserve. Yes, I know it sets monetary policy for the U.S., and that its interest rate boosts and cuts have major ramifications for our economy and even for the global economy. I know the Fed aims to curb inflation and bolster the economy. But in The American magazine the other day, I ran across some interesting details I thought were worth sharing. 

For starters, did you know that the Fed, since it has its own sources of income, isn't as tied to Congress as you might think? In other words, Congress isn't able to influence the government organization by controlling Fed purse strings. (Still, the Fed's governors are appointed by the president and confirmed by the Senate.)

How does the Fed -- the nation's central bank -- make its money? Primarily from the interest on government securities in which the bank has invested. In 2006, the Fed netted $29 billion in profit -- all of which it turned over to the U.S. Treasury.

That kind of income dwarfs most public companies. Sure, ExxonMobil (NYSE:XOM) has been making that much in just three quarters. But Microsoft's (NASDAQ:MSFT) net income is around $15 billion annually. General Electric's (NYSE:GE) $21 billion isn't too close, and neither is Citigroup's (NYSE:C), also in the low $20s.

Abolish it?
By the way, for those who like to think deeply about the Fed and argue its merits, there's an interesting discussion on our boards about the Fed's value -- it was sparked when a Fool Community member stated that presidential candidate Ron Paul is in favor of abolishing the Fed and perhaps returning the country to the gold standard.

In an alternate universe, with a gold standard and no Fed, the danger of inflation would exist when new gold deposits are discovered, and deflation would also be a risk, should we start to run out. Many believe that using a commodity like gold as the primary form of money limits the ability of central banks to assist the economy and respond to crisis situations.

Most of would probably agree that our current Fed system seems to be working. Still, interest rates do have a major impact on our lives, so it's good to know where they come from, and what influences them. Learn more about the Fed from the horse's mouth.

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