The U.S. Federal Reserve has just ended its two-day meeting and has decided to do -- wait for it -- nothing. And that's a good thing, because it's a sign that the powers-that-be think the economy is on the right track.

Here's a quick primer on the Fed, why you never want a central bank to have to do anything, and the reason why we all hang on Ben Bernanke's every word.

A Lender of Last Resort

The U.S Federal Reserve is America's central bank. The primary job of a central bank is to be a "lender of last resort." That is, if a country's commercial banks are experiencing some kind of crisis, the central bank steps in and injects "liquidity" into the system, thereby keeping the banks financially afloat, or "solvent." Liquidity is a fancy term for money. Central banks, by design, have the power to literally print money.

The other job of a central bank is to manage and tweak an economy when it's not in outright crisis. Central banks do this via various macroeconomic tools. The Fed primarily uses interest-rate manipulations:

  • If the economy is weak, it lowers interest rates -- theoretically spurring lending, spending and economic growth.
  • If the Fed thinks the economy is growing too fast and there's danger of a "bubble," i.e., too much lending and spending, it will raise interest rates to slow the economy down.

All developed countries with capitalist economies have central banks, with varying powers, to gently massage a country's economy through normal times and radically intervene in times of emergency.

Inaction Can Be the Best Course of Action

The U.S. Federal Reserve is actually a system of banks spread out across the country that meets eight times a year to assess how the U.S. economy is performing and determine what, if any, action needs to be taken.

The most recent meeting ended Thursday, with the Fed saying there would be no changes to its policy right now.

What the Fed is really saying is this: In its eyes, the economy is generally on track for a recovery, and there's nothing it should do right now to interfere. (If it ain't broke, the saying goes, don't fix it.)

Whether the economy really is on track for a recovery may be a matter for debate. And it could be argued that there's really not much the Fed can do right now. That is, we're currently in one of the weakest economies since the Great Depression, which argues for the lowering of interest rates, but interest rates are essentially at zero already. That's why you can get a 30-year home loan for less than 4% right now. So if interest rates can't get any lower, what could the Fed do, even if it wanted to?

Crank Up the Money Presses

As mentioned earlier, one of a central bank's jobs is to inject liquidity into a faltering economy. More money in the hands of the people means, theoretically, more spending, and therefore economic stimulation.

The Fed has already been through two rounds of this, which it calls "quantitative easing." Quantitative easing is when the Fed purchases securities, like U.S. Treasury bills, and thereby floods the economy with money indirectly, expecting it to make its way out into the hands of people and businesses via increased lending.

The Fed could do another round of quantitative easing, and the idea was batted about for a while. One of the dangers of too much quantitative easing, however, is inflation. Right now inflation is very low, and everyone wants it to stay that way.
With definite signs of economic improvement -- like a lowering of the unemployment rate and better-than-expected growth in the GDP -- the Fed decided not to do any more.

When Ben Speaks, People Listen

Ben Bernanke has been chairman of the Fed since 2006, when he was appointed by President Bush to replace the long-serving Alan Greenspan. When Bernanke speaks, people listen, and you can see why.

As America's central bank, with all of the financial and economic power that title implies, the Fed has great sway over all our lives -- whether we're average citizens, CEOs of Wall Street banks, or senators and presidents.

So the next time you hear Ben Bernanke say, "Following two days of intense discussions, we've decided to do nothing," take it as a good sign.


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Darrell & Donna

Good lets get rid of the feds''the cities;county and state have raised taxes on everything;the cost of living has went up over 10% in the past 18 months;;Keep the fat cats fat;;

April 30 2012 at 8:43 PM Report abuse +1 rate up rate down Reply
giogolf

The Fed doing nothing is great news. The Fed has to be relieved of its employment mandate and concentrate on a stable dollar. Probably the only way we will get a stable currency is with a gold standard.

April 30 2012 at 2:11 PM Report abuse +1 rate up rate down Reply
garryangel

I recall listening to the Rev. Schuller many years ago say ... "If you find yourself in trouble and don't know what to do, then do nothing." I don't know if the Fed has picked up on that, but they certainly cannot hatch QE3. Can they???

April 30 2012 at 1:48 PM Report abuse rate up rate down Reply
marmee16

so what is new?

April 29 2012 at 3:07 PM Report abuse rate up rate down Reply
yurday6

The economy is not on track. The Fed did not do another QE becasue inflation is already a problem and this will make it worse. The interest rates are low for so long and did not increase lending. Inflation is a real problem now, many companies are trying to avoid price increases because of competition with China and this causing low wages, less spending and the continuation of more bankruptcy's. My opinion is to increase interest rates, bring back manufacturing and thiis will get our economy moving again.

April 29 2012 at 12:22 PM Report abuse +1 rate up rate down Reply
dgs755

Hey, I just had an idea, Let's have our own
"Peoples Casino" like Wall Stret. Everyone buys derivatives on the number of jobless claims. All in for $20.00@ and you'll certainly want more at the price so you decide to borrow $200 and get more, then of course, insurance nust be purchased so you can swap this great investment to some fool if it goes the wrong way. And then the folks who collect all the chips in the casino say yes we will insure this, but do not expect us to pay you if something goes wrong cause we have other derivatives to buy too.
Most likely this will blow up so a 16 trillion government bail-out would be required for for the citizens.
Our government has no money to bail out the citizens, so as a last resort the citizens began photo copying those other peices of paper called Federal Reserve notes and used this amongst themselves as currency. What a story.

April 28 2012 at 9:11 PM Report abuse rate up rate down Reply
mgh406

The FED's biggest lie is "inflation is low". QE1 and QE2 have only helped wall street and the banks. The group of people hurt the most are the retired who are mostly on fixed incomes.

April 28 2012 at 2:10 PM Report abuse rate up rate down Reply
jjkrjw

I'm not going to waste my vote on Ron Paul, but he's certainly right about auditing the Fed. Why is there no oversight of the Fed? Why don't we know where the Fed is throwing our money?

April 27 2012 at 10:17 PM Report abuse +1 rate up rate down Reply
Escalonz

Right now inflation is very low, (That is incorrect and ask the grocery shopper if there is inflation. Govt. disinformation)

Likewise on the unemployment numbers....................

April 27 2012 at 10:14 PM Report abuse +2 rate up rate down Reply
Ronald Malozi

When the government isn't doing anything they're really trembling at the knees out of fear.

April 27 2012 at 5:16 PM Report abuse +3 rate up rate down Reply