Corporate Finance and the Federal Reserve and U.S. Treasury
A lot of people misconceive the actual role of the Federal Reserve. The actions of the Federal Reserve, however, are all quite transparent. Its reports are all available for public view, its actions are all over the news each day, and the public can even see its hearings on TV sometimes.
The Fed, as it’s often called, actually has very limited power, so some of the conspiracies that exist tend to be nothing more than fantasy.
In contrast, the U.S. Treasury is practically immune to conspiracy because it’s just an arm of the bigger federal government. The corruption usually exists among those with higher authority (the Treasury isn’t really a decision-making body).
The Federal Reserve actually isn’t a part of the federal government at all. It’s quasi-governmental, which means it performs functions related to managing the U.S. economy in cooperation with the government but isn’t actually under the direct control of any government body. Think of the Federal Reserve as the bank that other banks go to when they need banking services.
The Fed accepts deposits, makes loans to member banks, and facilitates loans between banks using the deposits. It also determines interest rates for certain key loans and the bank reserve requirement, which is the proportion of total deposits that commercial banks must keep available as liquid cash.
Bank reserve requirements are used to manage bank liquidity for customer withdrawals and to manage the supply of money in the nation as a whole. The Fed generates funds by charging interest and by charging member banks a membership fee.
The controversy and confusion comes into play as the Federal Reserve receives money from the U.S. Treasury and then lends it out to member banks. The setting of interest rates is also one of the responsibilities of the Federal Reserve.
The reality is that the Federal Reserve is simply acting as a middleman for the distribution of funds, although the government can distribute funds without help from the Federal Reserve by way of spending more money through hiring contractors or distributing stimulus spending (like the new homebuyer’s tax credit).
Banks tend to only purchase money from the Federal Reserve when they really need to increase the total amount of money available, since interbank loans are a cheap, fast, and easy way to handle short-term shortages of money in reserve.
What do corporations need to know about the Fed? Because it sets the rates that other banks pay to borrow money, it also indirectly controls the rates that banks will charge customers. After all, banks always charge rates higher than they, themselves, pay. The Fed also plays a large role in controlling money supply. In short, the Fed is in charge of U.S. monetary policy.
The U.S. Treasury is a division of the U.S. government and is, quite possibly, the simplest arm of the U.S. government to understand, at least regarding finance. The U.S. Treasury isn’t a decision-making body, so the actions it takes must always be set in motion by the federal government — either Congress, the president, the Supreme Court, or some combination of the three.
For instance, the Treasury distributes payments on behalf of the federal government, but it doesn’t make those payments on its own. Congress sets the budget for each branch of the government, and when the branches spend that money, the Treasury’s job is to actually distribute the allotted funds.
That being said, the Treasury is in charge of distributing government funds, collecting revenues by way of the IRS, issuing government debt (by selling Treasury bonds, Treasury notes, and Treasury bills, which are how government debt is generated), printing new money, and destroying old/damaged/faulty money.
What you need to know about the Treasury is that it’s where your government bonds and risk-free investments come from and it’s where your payments come from if you own government investments or do any contracting work for the federal government, as many corporations do.