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general and broad testimony on the current and future outlook of the economy to Congress twice a year. The event is known as the Humphrey-Hawkins testimony (named after the original sponsors of the act) during which the Fed chairman is called upon to address Congress. There are also a few other testimonies such as budget reviews and annual reports. Other than the Board of Governors’ appointment and the testimonies, there is little involvement on the part of the US government in the activities of the Federal Reserve Board. This allows the Federal Reserve System to operate as an independent entity, relatively free from government involvement, making it more efficient and less prone to manipulation.

In 1968 the US abandoned the Gold Standard, as it was believed that this model limited the economy’s ability to expand. Today the US Dollar is backed by an intricate fabric patterned from several components, including gold, and domestic and foreign securities. But the US Dollar is ultimately backed by the goods and services produced by the US economy, which in turn is tightly related to the pool of talent and productivity in the US: that is, you and me.

One of the major weapons in the Federal Reserve’s arsenal is the ability to manipulate interest rates. This is achieved by regulating cash flow in the public domain, and it works on the basic principle of supply and demand. When the Federal Reserve wants to slow down an overheated economy it siphons cash out of the public domain (thereby stemming inflation). Conversely the Federal Reserve can jump start a sluggish economy by injecting cash into it (thereby stimulating growth). The cash flow regulation is achieved through a set of programs laid out by the Fed and collectively referred to as the Monetary Policy. How and why the economy is regulated through the Monetary Policy and what cash supply and demand have to do with it is discussed after a quick look at the concept of reserve. …