Bank Investing

CHAPTER 7Role of the Central Bank and Interest Rates

“Interest rates are to asset prices what gravity is to the apple. When interest rates are low there is little gravitational pull on asset prices. Interest rates power everything in the economic universe.”

– Warren Buffett at the Berkshire Hathaway Annual Meeting May 4, 2013

ROLE OF THE CENTRAL BANK

The Federal Reserve is the central bank of the United States. Though its existence feels perennial, it is actually the third central banking system implemented in the United States, preceded by the aptly named First Bank of the United States (1791–1811) and the Second Bank of the United States (1817–1836), as well as a rather messy period that involved a network of national banks.

Founded by Congress in 1913 following a secretive meeting on Jekyll Island between members of the government and some of the most important bankers of the time, the Federal Reserve is the monetary authority that manages the currency, money supply, and interest rates in the United States, and serves as a primary regulator in the banking industry.

The Federal Reserve is comprised of two main entities (Exhibit 7.1): a central authority known as The Board of Governors, based in Washington, D.C., and a network of 12 Federal Reserve Banks with different geographical domains – Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. These districts were set up many years ago, and ...