The Fed, Treasury, Monetary Policy and BuildUSA

This post is the first of a series of posts. The goal is to provide an intuitive understanding of how the economy and its primary institutions the “Fed”, the “Treasury” and the primary commercial banking industry operate the US’s economy and how the decisions made assist or detract from the building industry in general and BuildUSA in specific. 

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The Main Financial Players 

We can agree that the economy is not an easy thing to understand. The process of trying to make this topic accessible, and provide clarity for myself, took a lot of effort. Then trying to make the topic comprehensible was a larger undertaking than I originally imagined. The first order of business was to define who the primary players were, and their primary role in the system. So, I am starting at the very beginning, who are the players in the banking system and what do they do? 

The U.S. Department of the Treasury has several key purposes that revolve around managing the nation’s finances and ensuring economic stability. 

1. Economic Stability and Growth 

• Promoting Economic Conditions: The Treasury works to create conditions that foster economic growth and stability, both domestically and internationally. 

2. Financial Management 

• Managing Government Finances: This includes producing currency, collecting taxes, and disbursing payments to ensure the smooth operation of the federal government. 

• Debt Management: Issuing and managing U.S. government debt to finance government operations and influence interest rates. 

3. National Security 

• Combating Financial Threats: The Treasury plays a crucial role in protecting the financial system from abuse, including money laundering and terrorist financing.  

• Economic Sanctions: Implementing and enforcing economic sanctions to achieve foreign policy and national security goals. 

4. Regulatory Oversight 

• Financial Regulation: Ensuring the stability and integrity of the financial system through regulatory oversight and enforcement. 

5. Public Services 

• Currency Production: Overseeing the production of coins and currency to ensure an adequate supply of money. 

• Financial Services: Providing various financial services to the U.S. government, financial institutions, and the public. 

The U.S. Department of the Treasury has several key tools at its disposal to promote economic stability and growth 

1. Fiscal Policy 

• Taxation: Adjusting tax rates and tax policies to influence the economy. For example, tax cuts can stimulate spending and investment. 

• Government Spending: Increasing or decreasing public spending on infrastructure, education, and other areas to boost economic activity. 

2. Debt Management 

• Issuing Treasury Securities: Managing the issuance of Treasury bonds, notes, and bills to finance government operations and influence interest rates. 

• Debt Buybacks: Reducing the national debt by buying back existing securities. 

3. Financial Regulation 

• Regulatory Oversight: Implementing and enforcing regulations to ensure the stability and integrity of the financial system. 

• Consumer Protection: Protecting consumers from unfair financial practices and ensuring transparency in financial products. 

4. Economic Sanctions 

• Sanctions and Embargoes: Imposing economic sanctions on foreign entities to achieve foreign policy and national security goals. 

5. Currency Management 

• Currency Production: Overseeing the production of coins and currency to ensure an adequate supply of money. 

• Exchange Rate Policies: Influencing exchange rates through interventions in the foreign exchange market. 

6. Emergency Economic Measures 

• Bailouts and Stimulus Packages: Providing financial assistance to key industries or sectors during economic crises. 

• Economic Relief Programs: Implementing programs to support individuals and businesses during economic downturns. 

7. Collaboration with Other Agencies 

• Coordination with the Federal Reserve: Working with the Federal Reserve on monetary policy to control inflation and stabilize the economy. 

• International Cooperation: Collaborating with international financial institutions and other countries to promote global economic stability. 

The Federal Reserve “The Fed” is the central bank of the United States. Its primary purpose is to ensure a stable and flexible monetary and financial system. Here are the main goals and functions of the Fed: 

1. Conducting Monetary Policy 

• Price Stability: The Fed aims to maintain stable prices by controlling inflation. 

• Maximum Employment: It strives to achieve the highest level of employment possible without triggering inflation¹. 

2. Supervising and Regulating Banks 

• Safety and Soundness: The Fed oversees and regulates banks to ensure the stability and safety of the banking system². 

• Consumer Protection: It protects consumers’ credit rights and ensures fair and transparent financial practices². 

3. Maintaining Financial Stability 

• Systemic Risk Management: The Fed works to contain and manage risks that could threaten the stability of the financial system². 

• Crisis Management: It acts as a lender of last resort to provide liquidity to the banking system during financial crises². 

4. Providing Financial Services 

• Payments System: The Fed plays a key role in operating and overseeing the nation’s payments systems². 

• Services to Government and Financial Institutions: It provides various financial services to the U.S. government, financial institutions, and foreign official institutions². 

There are two key mechanisms used to influence a nation’s economic activity, but they are managed by different entities and use different mechanisms. The Fed controls and manages Monetary policy and the government (both the executive and legislative branches) control and manage Fiscal Policy: 

1. Monetary Policy’s goals have a few key tools at its disposal 

• Interest rates 

• Reserve requirements, and  

• Open market operations. 

These tools are used to control the money supply and influence interest rates to achieve the macroeconomic goals of: 

• Maintaining price stability 

• Achieving maximum employment, and 

• Ensure moderate long-term interest rates 

2. Fiscal policy’s goals have two key tools at its disposal: 

• Taxation, and  

2. Government spending. 

These tools are used to influence the economy by adjusting the levels and allocation of government spending and tax policies, to achieve the goals of: 

1. Stimulate economic growth 

2. Reduce unemployment, and 

3. Manage through direct government intervention in the economy 

The 3^rd primary player in our economic system are the Primary commercial banks. They interact directly with the monetary policies set by the Fed and commercial banks are crucial to the  fractional reserve banking  system. Which allows banks to extend new loans of up to (typically) 90% of the deposits they have on hand, theoretically growing the economy by freeing capital for lending. All of us who have business/personal banking accounts and take out loans for various business and personal needs have relationships with commercial banks. 

The goals and tools that define the US Treasury and the Fed, have been at the heart of the nightly news casts, podcasts, youtubers and any other source news source for decades. But, since the financial crisis of 2008, we have all been bombarded non-stop by these issues. This will continue to be true in the coming years, and understanding how these forces operate and impact on our world of building will be critical for the future success of our industry and each of our individual companies, 

Now that we know the main players, the next blogs in this series will go into more detail on how this system works, and more importantly how it directly impacts our daily building business.