10 Important Functions Performed by the Federal Reserve that You’ve Never Heard About

Most people know that the Fed performs functions like adjusting the discount rate and federal funds rate, clearing checks, and lending money to banks. But our nation’s bank is much more than that, providing services that support communities and help banks stay afloat. Here you’ll discover 10 Federal Reserve functions that aren’t often discussed.

  1. Standards in new technology

    It’s common knowledge that the Federal Reserve processes electronic banking and ACH transactions, but did you know that they also create new technologies and set industry standards for banks? The St. Louis Fed reports, "one of [our] specialties, for example, is to develop new software applications for the U.S. Treasury, which is increasing its use of electronic receipts and payments to reduce costs and improve services." Additionally, "the Fed has helped pioneer some electronic payments systems itself, such as the automated clearing house." Once new technologies are implemented, the Federal Reserve works with banks to monitor and standardize in the areas of "system risk, MICR encoding, ACH technology, and digitized image standards and processing."

  2. Bank examination beyond books and practices

    The Fed has to consider events in banking that may affect our economy and act to minimize their risk. That means that they issue advisories to alert institutions to risks as well as examine these institutions for compliance. For example, the Fed prepared for Y2K by establishing benchmarks for compliance and began examining for readiness in June 1998. Additionally, the Federal Reserve created contingency scenarios in case of plan failure.

  3. Stress testing

    Another way the Federal Reserve minimizes risk is through stress testing. The Fed is expected to plan for the unexpected future in financial markets, and it’s difficult to know how the market will react until the situation presents itself. By stress testing, the Federal Reserve attempts to predict scenarios. In these tests, "historical data from asset price distributions" or other scenarios are used to create a look into financial risks of the future.

  4. Promoting economic education

    Today, many adults have very little financial literacy, a problem that leaves them vulnerable to predatory lending practices, poor money management, and a lowered understanding of how our economy works. To combat this, the Fed has established a number of programs that help both students and adults educate themselves about money and the way the Federal Reserve works. For students, the Federal Reserve offers the "Fed Challenge," a program that allows groups of high schoolers to create their own mock Federal Reserve. For teachers, the Fed provides hands-on instructional workshops. Additionally, the Federal Reserve offers education in the form of exhibits and tours.

  5. Community reinvestment

    According to the Community Reinvestment Act of 1977, banks are required to offer their services to underserved populations and small businesses. The Federal Reserve, along with government institutions, enforces this requirement by evaluating the CRA performance of individual banks. A bank’s performance is considered when the bank applies to "expand, merge or acquire another institution." Ratings and evaluations are also made public so that consumers can be informed about how their bank measures up. This function, unfortunately, has been criticized as a possible cause of the subprime mortgage financial crisis, as it may have pushed banks to lend to customers that were not creditworthy.

  6. Support of minority-owned institutions

    Supplementing the Federal Reserve’s commitment to community reinvestment is the support of minority-owned institutions. Through the Minority-Owned Institutions Program, the Fed supervises and promotes these institutions that are vital to serving historically underserved markets. In this not-yet-released program, participating institutions are offered proactive training and technical assistance. Essentially, the program takes participants through the stages of starting up, managing growth, and maintaining the institution.

  7. Consumer rights protection

    One of the responsibilities that the Federal Reserve is charged with is the assurance of "safe and sound" banking. Obviously, this means regulating banks to ensure that they’re practicing responsible lending, but beyond that, it means that the Fed is a consumer defender. In this role, the Federal Reserve supervises banks to protect consumers and has the power to create laws to do so. As part of this responsibility, the Fed is charged with the implementation and enforcement of the Truth in Lending Act, the Electronic Funds Transfer Act, and the Fair Housing Act.

  8. Local economy monitoring and support

    As a national figure, the Federal Reserve is often seen as one with a broad view of the economy, but that broad view is made up of a number of very finite views. Each Federal Reserve bank monitors its local economy for both current events and an understanding of the economy. They seek out insight on "who’s hiring, who’s firing, who’s investing in new equipment and buildings, whether home sales are going up or down, whether local businesses are expanding and much more." Additionally, the Federal Reserve banks assist local institutions in creating more access to capital and credit by "hosting forums and bringing together lenders, government agencies and community development groups."

  9. Innovating bank protection

    The Federal Reserve considers issues that concern banks, like retail payment fraud. This March, the Federal Reserve Bank of Minneapolis held a roundtable discussion with institutions, corporations, service providers, and law enforcement for advisement. The aim was to balance the costs and benefits of fraud prevention as well as gather insight into how the Federal Reserve can assist the banking industry in mitigating fraud.

  10. Economic research

    Obviously, the Fed collects current economic information to make decisions about monetary policy. But the Federal Reserve goes beyond this function to conduct research that includes historic information and other economic knowledge. Through this economic research, the Fed is able to advance economic knowledge throughout the bank system and the general public. In addition to collecting information, this function includes seminars, reports, searchable Internet databases, and conferences.

While economic forecasting and interest rate adjustment are what most people think of when they think about the Fed, there are dozens of other activities that the Federal Reserve engages in. The 10 important functions highlighted in this article are intended to provide you with just a glimpse of the diverse activities taken on by one of the United States most publicly revered yet often misunderstood administrative bodies.