Does the Federal Reserve control the US economy?

Answer

The FED controls the economy through 2 levers of control that are exclusive to it.

They are:

They have the lever to create (out of thin air) money (money supply), which is achieved through lending it to the government and FED member banks. All money in circulation is borrowed from the FED. In this way the FED controls all lending of its FED Reserve notes.

They have the lever of interest control over all money, directly and indirectly through their "FED rate," which is the FED member banks borrowing rate. All borrowed/created money from the FED has an interest rate attached.

To control the economy, which is based upon the cost of its money supply, all they have to do is raise or lower interest and rein out or in lending. To drive the economy up, they reduce interest rates and free up lending (supply). To create a recession, they do just the opposite. The best example of how this works is in the study of our current economic situation.

During 2001 through 2004, the FED lowered interest rates and freed up lending. The mortgage industry responded with large volumes of mortgages readily sold. These mortgages were attractively offered with low payments, but were "variable" rate loans and the low payment would go up if the "rate" went up.

The FED raised the rate at the base level of where all money gets its rate to exist. This occurred between mid 2004 and mid 2006, and was sufficient enough to drive up the variable rate mortgage payments of most of the nation.

This movement up of the rate and the subsequent curtailing of lending to that industry caused the people with these mortgages who did not have the reserve between making the higher payments and money for food, to opt for bailing out on their mortgages. Those first affected tried to sell their homes to get their equity, but the numbers of so many selling caused a glut in the housing market bringing down values and removing any equity. Walking from what would then become over valued homes with high payments seemed to be the only option for so many. Essentially the same situation would affect the auto industry. The dominoes continue to fall until the FED lowers the interest rates and frees up lending.

It should be noted that the bailing out required after this rate adjustment event, transfers the financial portfolios and assets to the FED's closest banking associates. When the rate is lowered, these portfolios will perform again and their private shareholders will flourish.