What does the Federal Reserve do?

The Federal Reserve, as the central bank of the United States, plays two crucial roles: maintaining price stability and curbing inflation. Therefore, its independence, free from control by the federal government, is a prerequisite for fulfilling its functions. So, what led to the establishment of the Federal Reserve?

Bank run, depositors rush in

On October 16, 1907, two stock speculators, due to their failed manipulation of the stock price of a joint copper industry, faced a situation where the supply of copper exceeded demand, causing prices to plummet. The two individuals became embroiled in a run dispute. A few days later, banks associated with these speculators were implicated, and upon hearing the news, depositors rushed to withdraw their money, leading to an escalating bank run.

Morgan, the New York Clearinghouse intervenes

Subsequently, the New York Clearinghouse intervened, taking various measures. Although it successfully resolved the internal bank run, trust companies began to tremble! A trust company named Knickerbocker, unable to access the Clearinghouse's settlement system, faced a run and sent an SOS to J.P. Morgan. However, Morgan's assistance was conditional upon the authenticity of the situation! They sent people to the company to verify its financial status, but due to the cumbersome procedures and time constraints, no clear recovery was provided. At this point, the depositors could not wait any longer and flocked to withdraw, exchanging $8 million in a single day, causing Knickerbocker to collapse immediately! At this juncture, Morgan also acted chivalrously, deciding to provide immediate assistance without further investigation. The Clearinghouse also joined in, adding to the financial support. Two weeks later, everyone breathed a sigh of relief as the run crisis finally ended. (If it hadn't ended, they wouldn't have been able to hold on!)

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Birth after the crisis!

Following this crisis, numerous banks and trust companies frequently encountered crises. At this point, Morgan felt that he could no longer stand idly by! He began to acquire these banking institutions, and after the then-President Roosevelt signed into effect, the acquisition took place, making Morgan a true financial giant. After this great panic, the general public also urgently hoped to establish a central bank to manage risks for financial institutions. In 1913, with President Wilson's support, the Federal Reserve Act was passed, officially announcing the establishment of the Federal Reserve. Thus, the "cold-blooded emperor" was officially born! However, the newly born "cold-blooded emperor" was very weak, and it was through numerous trials and crises that it became the giant it is today.

The transformation from weak and powerless to powerful and boundless:

The newly established Federal Reserve did not have the influence it has today! It was merely a role that executed orders from the Treasury Department. Its two tools, monetary policy, were controlled by the Treasury, and it could not independently decide on interest rate policy, truly a figurehead commander.However, the subsequent development, from 1929 to 1933, experienced the Great Depression, highlighting the flaws of this arrangement. After World War II, there was immense inflationary pressure, leading to a severe conflict between the Treasury and the Federal Reserve. To resolve this, in 1951, the two parties reached the "Treasury-Federal Reserve Accord." The core content was that the Federal Reserve would no longer follow the Treasury's instructions but would exercise the role of two important tools based on its own judgment, and thus the "Emperor of Cold Blood" grew up.

After the rate cut, what about the flood of liquidity? How will precious metals perform?

Having said that, how will the Federal Reserve's decision to cut interest rates affect the trend of precious metals? The previous interest rate hike cycle by the Federal Reserve led to a siphoning of funds into the United States, with foreign currencies flowing into the domestic U.S. market, resulting in a reduction of money. Currently, the Federal Reserve is about to succumb to the pressure of high interest rates, and with the labor market slowing down, it is about to enter an interest rate cut cycle! The flood of liquidity during the interest rate cut cycle may be bullish for precious metals, which is worth our anticipation!