Download Federal Reserve System

Federal Reserve System
• Established by an Act of Congress in 1913.
• System that coordinates commercial banking
operations, regulates some aspects of all depository institutions
and oversees the United States Money Supply.
• The Depository Institutions Deregulation and
Monetary Control Act of 1980 expanded the ability of thrift
institutions to create money as the commercial banks, but also
put them under regulatory control of the FED.
The primary goal of the FED is to adjust the money supply to
meet the needs of the economy. Through its control of the size
of the money supply, the FED has the ability to influence the
levels of employment and prices in the economy. It can also be
part of policies which alleviate the problems of unemployment
and inflation.
• The Board of Governors are seven members appointed
by President, approved by Senate for 14-year terms.
Ben Bernanke is current chairman. He acts as
spokesman and is leader in setting pace of monetary policy for
the economy.
The Board develops objectives and policies that are
consistent with the stated goals. The current goals include low
interest rates that will stimulate investment spending and low
rates of inflation to protect the value of the nation’s income.
• The Open Market Committee includes Board members
and 5 of the district bank presidents who authorize the buying
and selling to government securities by the FED.
• The Federal Advisory Council include 12 commercial
bank presidents from the 12 districts and offers advice on the
nation’s financial situation to the Board.
• The 12 Federal Reserve District Banks (and 25
branches) are the central bank of the US and serve as
“bankers’ bank”. They deal with commercial banks and thrifts;
they enforce the Board policies, and operate as independent
entities which are owned by their member banks.
Functions of the FED include:
√ Provides banking services for financial institutions
• supplies currency from member bank accounts with FED
• processes checks thru its check-clearing system
• holds member bank reserves and other deposits
• makes loans to financial institutions when necessary
• provides wire transfer services (ETS)
√ Banker to the Federal Government
• maintains the Treasury Department’s checkbook
• issues and redeems government bonds and other securities
√ Supervises and regulates the nation’s banking system
• establishes rule of behavior for banking system
• shares responsibility with Comptroller of the Currency
and Office of Thrift Supervision
√ Manages the Supply of Money and Credit
• responsibility to see that money and credit supply are
matched to demand
The FED uses its three tools:
√ Reserve Requirements specifies the amount of reserves
that banks must keep in vault on deposit at the district FED
bank.
√ Discount Rate is the rate charged by the FED on loans
made to member banks who wish to supplement their own
reserves.
√ Open Market Operations are the actions of the FED in the
buying and selling of government securities.