The U.S. Federal Reserve System

Good Morning Ladies and Gentlemen

”Nvidia and Microsoft account for 15% of the S&P 500’s market capitalisation.”

Common Knowledge

When a government prioritises avoiding austerity measures over managing fiscal deficits, state expansion and the resultant increase in state deficits may become one-way streets. Nonetheless, Ladies and Gentlemen, it is essential to recognise that time is an expert at changing things, i.e. temporal dynamics can significantly alter any such trajectories.

To Make A Point

Perhaps it’s due to our work on the “In Gold We Trust” report, or perhaps it’s our general skepticism towards the ever-increasing government debt (to put it mildly), or simply our commitment to safeguarding our investors‘ purchasing power through various but coherent investment strategies, but I sometimes receive a range of intriguing messages about the “real facts” concerning the U.S. Federal Reserve System (and many other topics). Ladies and Gentlemen, we are neither flat-earthers nor pizza-gaters; we are a group of serious asset managers and economists dedicated to comprehending the global economic landscape and financial markets. For this reason, I feel compelled to share some clarifying information about the Federal Reserve System today, as there appear to be some misconceptions among some readers. What better time than now, during the ongoing Jackson Hole Economic Policy Symposium 2025 (taking place from August 21 to 23), which focuses on „Labour Markets in Transition: Demographics, Productivity, and Macroeconomic Policy“?

The Federal Reserve System

The Federal Reserve System serves as the central bank of the United States and is tasked with formulating and implementing monetary policy, consisting of the dual mandate of price stability and maximum employment. It is important to note that the Federal Reserve is not „owned“ by any individual or entity. Established in 1913 through the Federal Reserve Act, it was designed to function as the nation’s central banking authority. Its Board of Governors, located in Washington, D.C., operates as an agency of the federal government, reporting directly to and being accountable to Congress.

The Main Aspects of the Federal Reserve System

The Federal Reserve plays a crucial role in stabilising the U.S. economy by influencing money supply, interest rates, and inflation. The U.S. central banking structure has three key features.

Feature Number One

The first feature is its central governing board, the Federal Reserve Board of Governors, which establishes monetary policy, and the Federal Open Market Committee (FOMC), which manages open market operations and sets interest rates.

Feature Number Two

The second aspect is its decentralised network of 12 Federal Reserve Banks. I believe this is where some observers find confusion, as they mistakenly perceive the Federal Reserve as a private organisation. Each of the 12 reserve banks operates within its geographical area, or district, implements policies and provides financial services, and is incorporated as a separate entity with its own board of directors. Commercial banks that are members of the Federal Reserve System own shares solely in the reserve bank of their district and are subject to its regulations. It is important to note that holding shares in a reserve bank differs significantly from owning shares in a private company. Reserve banks do not operate for profit, and possessing a certain number of shares is, by law, a requirement for membership in the system. Furthermore, the reserve banks are obligated by law to transfer their net profits to the U.S. Treasury.

Feature Number Three

The third feature combines public and private elements because the Board of Governors, appointed by the American President and confirmed by the Senate, provides overarching guidance for the Federal Reserve System and supervises the 12 Reserve Banks. While the Board is accountable to Congress and testifies before it regularly, it is uniquely funded outside of congressional appropriations. Additionally, the Board submits a comprehensive report, i.e. the Monetary Policy Report, twice a year, detailing recent economic developments and outlining its plans for monetary policy.

Conclusion

I hope this simple explanation provides some clarity and facilitates a deeper understanding of the American central banking system. Oh yes, and I almost forgot today’s quote. How does it make you feel when you see that two companies account for 15% of the 500 companies‘ market cap that make up the S&P 500?

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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9494 Schaan/Liechtenstein
Mail: smk@incrementum.li