The Federal Reserve System: A Brief History, Function, and I Bonds

The Federal Reserve System, commonly known as the Fed, is the central banking system of the United States. It was created by Congress in 1913 as a response to the financial panic of 1907, which highlighted the need for a more stable and flexible financial system. The Fed's primary objective is to promote price stability and full employment through monetary policy.

 

Before the creation of the Fed, the United States had a decentralized banking system that was prone to instability and crises. In response to the panic of 1907, Congress created the National Monetary Commission to study the banking system and propose reforms. The Commission's report, published in 1912, recommended the creation of a central bank. The Federal Reserve Act was signed into law by President Woodrow Wilson on December 23, 1913.

The Fed has three main functions: monetary policy, supervision and regulation of banks, and maintaining the stability of the financial system. Monetary policy is the most well-known and important function of the Fed. The Fed sets interest rates and conducts open market operations to achieve its dual mandate of price stability and full employment.

Over the last decade, the Fed has kept interest rates at historically low levels in response to the Great Recession and the COVID-19 pandemic. In December 2008, the Fed lowered the federal funds rate to near zero, where it remained until December 2015, when it was raised to 0.25%. The Fed continued to gradually raise rates over the next few years, reaching a peak of 2.50% in December 2018. However, in response to the economic effects of the COVID-19 pandemic, the Fed once again lowered interest rates to near zero in March 2020.

In addition to its monetary policy function, the Fed also offers I bonds, a type of U.S. savings bond. I bonds are inflation-protected bonds that offer a fixed rate of return plus an adjustable rate based on the rate of inflation. I bonds can be purchased online through the TreasuryDirect website. The current bond composite rate is 4.3%. That rate applies for the first six months for bonds issued from May 2023 to October 2023, that makes them so attractive. For example, if you purchased I bonds on May 1, 2023, the 4.3% rate would be in effect until Oct. 31, 2023.

To purchase I bonds online, you will need to create a TreasuryDirect account and provide personal and financial information. Once your account is set up, you can purchase I bonds using funds from a linked bank account. The minimum purchase amount is $25, and the maximum annual purchase limit is $10,000 per Social Security number.

To purchase I bonds, follow these steps:

• Go to the TreasuryDirect website and click on "Open an Account."
• Enter your personal information, including your name, address, and Social Security number.
• Set up your account security, including your username and password.
• Link your bank account by providing your account number and routing number.
• Verify your linked bank account by providing your bank's information and answering security questions.
• Select "BuyDirect" to purchase I bonds.
• Choose the type of bond you want to purchase and the amount you want to invest.
• Confirm your purchase and wait for your bonds to be issued.

 

The Federal Reserve System plays a crucial role in the U.S. economy, promoting price stability and full employment through its monetary policy function. Over the last decade, the Fed has kept interest rates at historically low levels in response to economic conditions. In addition to its monetary policy function, the Fed also offers I bonds, a type of U.S. savings bond that can be purchased online through the TreasuryDirect website. By following the steps outlined above, you can easily purchase I bonds and invest in your financial future.