Economics
The Federal Reserve
The Federal Reserve, often referred to as the Fed, is the central bank of the United States. It is responsible for conducting monetary policy, supervising and regulating banks, and maintaining the stability of the financial system. The Fed also plays a key role in influencing interest rates and managing the country's money supply.
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12 Key excerpts on "The Federal Reserve"
eBook - PDFIntroduction to Finance
Markets, Investments, and Financial Management
- Ronald W. Melicher, Edgar A. Norton(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
By exercising its influence on the monetary system of the United States, the Fed performs a unique and important function: promoting economic stability. It is notable that the system’s broad powers to affect economic stabilization and monetary control were not present when the Fed came into existence in 1913. At that time, the system was meant to do the following: help the money supply contract and expand as dictated by economic conditions, serve as bankers’ banks in times of economic crisis, provide a more effective check-clearance system, and establish a more effective regulatory system. Many of these responsibil- ities initially fell to the 12 Reserve Banks, but as the scope of responsibility for the monetary system was broadened, power was concentrated with the BOG. Today the responsibilities of the Fed may be described as relating to monetary policy, supervision and regulation, and services provided for depository institutions and the government. Public discussions of Fed operations are almost always directed toward dynamic actions that stimulate or repress economic activity or the level of prices. However, we should recognize that this area is but a minor part of the continuous operation of The Federal Reserve System. Far more significant in terms of time and effort are the defensive and accommodative responsibilities. Defensive activities are those that contribute to the smooth, everyday functioning of the economy. Unexpected develop- ments and shocks occur continually in the economy; unless these events are countered by appropriate monetary actions, disturbances may develop. Large, unexpected shifts of capital out of or into the country and very large financing efforts by big corporations may significantly alter the reserve positions of the banks. Similarly, buyouts and acquisitions of one corporation by another, supported by bank financing, also affect reserve positions.
eBook - PDFThe Fourth Branch
The Federal Reserve's Unlikely Rise to Power and Influence
- Bernard Shull(Author)
- 2005(Publication Date)
- Praeger(Publisher)
It is typically the lead U.S. agency in developing internationally uniform banking regulations. Monetary policy, traditional bank regulation and supervision, bank mergers and bank activity expansion are not the only areas in which the growth of Federal Reserve authority and influence is notable. It is, today, a principal operator and regulator of payments systems; that is, the mecha- nisms through which actual payments for goods, services, and debt take place. 10 There has been extensive legislation since the late 1960s in the consumer credit area to provide consumers with accurate information on lending terms and to prohibit unfair and discriminatory practices; the Fed- eral Reserve is the principal developer of regulations. 11 The development of these responsibilities is not reviewed in detail below, but, in general, it has been consistent with the expansion of the System's influence in other areas. The Federal Reserve exercises its extraordinary powers to public acclaim or denunciation, frequently depending on the state of the economy. For at least a half century after it was created, its policies rarely reached the gen- eral public's consciousness and then only in times of severe economic and financial distress. Policies were typically not made public in a timely fashion, if at all. Its principal officials were, in general, not recognizable public figures. A notable change has been the public awareness of the System and the board's chairmen, most recently Alan Greenspan. The chairman today is obliged to make regular appearances before congressional committees and to make his views public on a wide range of economic and financial issues. He has become a popular icon. 10 The Fourth Branch Though its monetary policies are still formulated in closed meetings, they are made public promptly thereafter. After each FOMC meeting, large numbers of people wait with interest and concern for the announce- ment of the committee's decision on interest rates.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- White Word Publications(Publisher)
The opinion went on to say, however, that: The Reserve Banks have properly been held to be federal instrumentalities for some purposes. Another relevant decision is Scott v. Federal Reserve Bank of Kansas City , in which the distinction is made between Federal Reserve Banks, which are federally-created instrumentalities, and the Board of Governors, which is a federal agency. Monetary policy The term monetary policy refers to the actions undertaken by a central bank, such as The Federal Reserve, to influence the availability and cost of money and credit to help ____________________ WORLD TECHNOLOGIES ____________________ promote national economic goals. What happens to money and credit affects interest rates (the cost of credit) and the performance of the U.S. economy. The Federal Reserve Act of 1913 gave The Federal Reserve authority to set monetary policy. Interbank lending is the basis of policy The Federal Reserve sets monetary policy by influencing the Federal funds rate, which is the rate of interbank lending of excess reserves. The rate that banks charge each other for these loans is determined in the interbank market but The Federal Reserve influences this rate through the three tools of monetary policy described in the Tools section below. The Federal Funds rate is a short-term interest rate the FOMC focuses on directly. This rate ultimately affects the longer-term interest rates throughout the economy. A summary of the basis and implementation of monetary policy is stated by The Federal Reserve: The Federal Reserve implements U.S.
eBook - PDF- Jeff Madura(Author)
- 2020(Publication Date)
- Cengage Learning EMEA(Publisher)
Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 71 During the late 1800s and early 1900s, the United States experienced several banking panics. In 1913, in an effort to enhance the safety of the U.S. banking system, the government enacted The Federal Reserve Act, which created The Federal Reserve System. Today, the Fed is involved (along with other agencies) in regulating large commercial banks and savings institutions, as is discussed in Chapter 18. As the central bank of the United States, the Fed is responsible for con- ducting national monetary policy in an attempt to achieve full employment and price stability (low or zero inflation) in the United States. Because the Fed’s monetary policy has a major influence on interest rates, it has a major influence on financial markets and institutions. 4-1 Organizational Structure of the Fed The Fed as it exists today has five major components: ■ ■ Federal Reserve district banks ■ ■ Member banks ■ ■ Board of Governors ■ ■ Federal Open Market Committee (FOMC) ■ ■ Advisory committees 4-1a Federal Reserve District Banks The 12 Federal Reserve districts are identified in Exhibit 4.1, along with the city where each district bank is located. The New York district bank is considered the most important because many large banks are located in this district. Commercial banks that become members of the Fed are required to purchase stock in their Federal Reserve district bank. This stock, which is not traded in a secondary market, pays a maximum dividend of 6 percent annually. Each Fed district bank has nine directors. The three Class A directors are employees or officers of a bank in that district and are elected by member banks to represent mem- ber banks. The three Class B directors are not affiliated with any bank and are elected by member banks to represent the public.
eBook - PDFThe Great American Housing Bubble
The Road to Collapse
- Robert M. Hardaway(Author)
- 2011(Publication Date)
- Praeger(Publisher)
12 The Federal Reserve It has been alleged that the easy-money polices of The Federal Reserve in the aftermath of the 2000–2001 stock market collapse played a significant role in the final stages of the housing bubble “blowoff,” culminating in the collapse of 2007–2009. Although many factors must be reviewed cumulatively when analyzing the housing market, all purchases come down to money, and any conversation about money is incomplete without a focus on the U.S. Federal Reserve. It has been said that the central bank of the United States is to the world of finance and economic policy what the Supreme Court is to the law. 1 Just as the Supreme Court is the final arbiter concerning the law, the “Supreme Court of Finance” is the “lender and economic policy maker of last resort.” 2 The Federal Reserve has several policy tools that it utilizes to affect economic activity and inflation. 3 The most well-known tool by which The Federal Reserve accomplishes this goal is the federal funds rate, which in essence sets short-term interest rates. 4 The federal funds rate ultimately trickles down to the price at which consumers pay to borrow money. Although not directly linked, this rate effectively dictates the price at which potential homeowners can obtain the biggest obstacle standing in the way of the American dream: money! Another tool by which The Federal Reserve affects monetary policy is by acting as regulator and supervisor of the money that it lends. As the price of borrowing decreased, banks offered more creative financing options and loosened the requirements for who became the recipients of home mortgages. The Federal Reserve, however, remained unconcerned for some time at these developments, since loose loan standards seemed to be serving the political goals of revitalizing an economy that was recovering from a stock market crash and the terrorist attacks of September 11, 2001.
eBook - ePub- Todd A. Knoop(Author)
- 2019(Publication Date)
- Greenwood(Publisher)
5 What Is The Federal Reserve, and How Does Monetary Policy Work?Probably no government entity is as misunderstood—or as powerful—as The Federal Reserve. Central banks play a key role in influencing stock and bond markets. Here we will discuss the role that central banks such as the Fed play in modern economies, particularly their role in setting monetary and interest rate policy. We will talk about the goals of monetary policy, how the Fed attempts to achieve these goals, and how changes in Federal Reserve policy impact the returns to stock and bondholders. This chapter will conclude with a look back to the aggressive and experimental actions the Fed took during the global financial crisis of 2008 to help stabilize the economy and financial markets.WHAT IS A CENTRAL BANK?Central banks such as the U.S. Federal Reserve are one of the most important players in bond and stock markets—and in the performance of the economy as a whole. The actions of central banks impact the supply of money, interest rates, borrowing and lending, income, inflation, and, of course, bond and stock prices.The importance of central banks stands in direct contrast to how well the general public understands how central banks work. Most people have little idea who controls central banks and what determines their actions, instead viewing central banks as a black box to be ignored when economic times are good and scapegoated when times are not.So what is a central bank? Well, at the simplest level, a central bank is a bank for other banks and for the financial system as a whole. The primary goal of a central bank is to make sure that the financial system is functioning smoothly. This means making sure that there is adequate supply of money and liquidity in the financial system, that interest rates are stable, and that inflation is predictable. Central banks are an essential tool of financial development; today there are over 170 central banks, essentially one in every country.
eBook - ePub- Jack Rabin(Author)
- 2020(Publication Date)
- Routledge(Publisher)
How does monetary policy affect the U.S. economy? How does the Fed formulate strategies to reach its goals?HOW IS The Federal Reserve STRUCTURED?
The Federal Reserve System (called the Fed, for short) is the nation’s central bank. It was established by an Act of Congress in 1913 and consists of the seven members of the Board of Governors in Washington, D.C., and twelve Federal Reserve District Banks (for a discussion of the Fed’s overall responsibilities, see The Federal Reserve System: Purposes and Functions).The Congress structured the Fed to be independent within the government—that is, although the Fed is accountable to the Congress, it is insulated from day-to-day political pressures. This reflects the conviction that the people who control the country’s money supply should be independent of the people who frame the government’s spending decisions. Most studies of central bank independence rank the Fed among the most independent in the world.What Makes the Fed Independent?
Three structural features make the Fed independent: the appointment procedure for governors, the appointment procedure for Reserve Bank Presidents, and funding.Appointment Procedure for Governors
The seven Governors on The Federal Reserve Board are appointed by the President of the United States and confirmed by the Senate. Independence derives from a couple of factors: First, the appointments are staggered to reduce the chance that a single U.S. President could “load” the Board with appointees; second, their terms of office are 14 years—much longer than elected officials’ terms.Appointment Procedure for Reserve Bank Presidents
Each Reserve Bank President is appointed to a five-year term by that Bank’s Board of Directors, subject to final approval by the Board of Governors. This procedure adds to independence because the Directors of each Reserve Bank are not chosen by politicians but are selected to provide a cross-section of interests within the region, including those of depository institutions, nonfinancial businesses, labor, and the public.
eBook - ePub- John Cochrane, John B. Taylor, John Cochrane, John B. Taylor(Authors)
- 2016(Publication Date)
- Hoover Institution Press(Publisher)
In addition, the Reserve Bank presidents continue to bring valuable and diverse information and opinions to FOMC meetings that would not be as readily available if the committee consisted entirely of US presidential appointees (Goodfriend 2000). The Beige Book contains valuable real-time information that might be lost if the Reserve Banks had their powers significantly curtailed.One wonders if a monolithic central bank with its board appointed by the US president could have made these accomplishments. The experience of other advanced country central banks in the twentieth century suggests not. The Bank of England, the Banque de France, the Bank of Japan, and the Bank of Canada were subservient to their treasuries until after the Fed made its historic changes in the 1980s, which served as an example to them. The only two exceptions were the Swiss National Bank, which has always had a culture of price stability and also a federal structure like The Federal Reserve (Bordo and James 2008) and the Bundesbank, which was founded based on the stability culture of maintaining stable money (Beyer et al. 2013).Some Lessons from HistoryThe key lesson that comes from this historical survey is that the federal/regional structure of The Federal Reserve should be preserved. The Reserve Bank presidents should not be made US presidential appointments subject to Senate confirmation or subject to summary appointment and dismissal by the Board of Governors. This would only make The Federal Reserve System more politicized and would greatly weaken its independence.Federal Reserve power was greatly increased by the Dodd-Frank Act, which put the chairman of the Fed on the Financial Stability Oversight Council. It has the power to designate non-bank financial entities as systemically important financial institutions (SIFIs) and to require stress tests administered by The Federal Reserve.11
eBook - PDFExplaining and Forecasting the US Federal Funds Rate
A Monetary Policy Model for the US
- M. Clements(Author)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
INTRODUCTION The Fed describes monetary policy as ‘actions undertaken ... to influ- ence the availability and cost of money and credit to help promote national economic goals’. The Federal Reserve Act specifies that in conducting monetary policy, the Federal Open Market Committee (FOMC) should seek ‘to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates’. The Fed controls the three main tools of monetary policy: open market operations (the FFR), the discount rate, and reserve require- ments. This book examines only the FFR, which is influenced by open market operations, the buying and selling of securities, which is the Fed’s primary instrument for controlling monetary policy. The FOMC is responsible for open market operations and setting the FFR. The committee comprises 12 voting members and meets at eight scheduled meetings a year. The FFR is the interest rate at which depository institutions (banks) lend balances at the Fed to each other overnight. Changes in the FFR in turn affect other interest rates, both long and short term, such as government and corporate bonds, mort- gage and credit rates. The exchange rate of the dollar is also sensi- tive to changes in the FFR. Using this rate, the Fed can affect the price of money and credit. In this way it influences employment, output and inflation. Strictly speaking, the Fed’s mandate of ‘price stability’ is a misnomer. Price stability means, by definition, zero inflation. Also, CHAPTER 2 Monetary Policy at the US Federal Reserve 27 the mandate does not specify which inflation measure should be targeted. In reality, the Fed looks to achieve inflation stability using an inflation measure that it considers to best represent price move- ments across the economy. In February 2000, the Fed ostensibly signalled a preference for the Commerce Department’s Personal Consumption Expenditure (PCE) price index as its chosen inflation measure.
eBook - PDFDo They Walk on Water?
Federal Reserve Chairmen and the Fed
- Leonard J. Santow(Author)
- 2008(Publication Date)
- Praeger(Publisher)
Traditionally, borrowing from the Fed is considered a privilege and not a right, although this distinction is no longer clear cut. Federal funds rate: The interest rate at which federal funds are traded. Rates charged by banks with excess reserves to other banks that need overnight money to meet reserve requirements. The rate tends to fluctuate, but typically by small amounts, since the Fed- eral Reserve has a target rate which is publicly known. Free reserves: Borrowings by banks at the discount window that are subtracted from excess reserves in the banking system. It is a measurement of the ease or tightness of the Fed’s reserve policy. If borrowings are more than excess reserves, this difference is called net borrowed reserves. Monetary policy: Policies that a central bank, such as The Federal Reserve, develop to influence such important items as interest rates, money supply, bank credit expan- sion, prices, real economic growth, employment, and unemployment. Monetary policy is different from fiscal policy, which is carried out primarily through government spending and taxation, and is not a responsibility of The Federal Reserve. Reserve requirement: Federal Reserve rule mandating the financial assets that mem- ber banks must keep in the form of cash and other liquid assets as a percentage of demand deposits and time deposits. The money must be kept in the bank’s own vaults or on deposit with its regional Federal Reserve bank. unions—have access to the discount window. (The Federal Reserve is responsible for establishing the percentage of deposits that must be held by banks as backing for deposits, and the form these reserves must take to meet the mandated reserve- requirement rules of The Federal Reserve.) Discount window policy has not changed frequently, but when it has changed, it can be of considerable importance from a policy point of view. From the mid-1960s until 2003, the basic discount rate frequently was below the prevailing federal funds rate.
eBook - PDFCharting Twentieth-Century Monetary Policy
Herbert Hoover and Benjamin Strong, 1917-1927
- Silvano A. Wueschner(Author)
- 1999(Publication Date)
- Praeger(Publisher)
Chapter 1 The Emergence of Factions: Differing Views on the Roles for The Federal Reserve System This bill creates a "central bank." This plan is much more centralized, auto- cratic, and tyrannical than the Aldrich plan. It is true we are to have 12 regional banks; but these are but the agents of the grand central board, which absolutely controls them. The power is not with them; they are not in any material matter given independent action; they must obey orders from Washington. Rep. M. Towner (R. Iowa) The Federal Reserve System was officially established on December 23, 1913, when President Woodrow Wilson signed Public Act No. 43, 63rd Congress, or The Federal Reserve Act. The act was the outcome of a banking reform move- ment that grew out of the panic of 1893, but its immediate origin lay in the fi- nancial havoc wrought by the panic of 1907. The movement recognized that there were inherent defects in the American banking system, among which were the lack of an elastic currency, no adequate means of rediscounting commercial paper, and inadequate supervision of banking. The system, as Mark Sullivan later noted, was "a tangle of inadequacy and antiquation," and Congress was 1. Congressional Record, 63rd Cong., 1st sess., pt. 5: p. 4896. 2. Mark Sullivan, Unpublished Manuscript, in Mark Sullivan File, PPI, HHPL. 2 Charting Twentieth-Century Monetary Policy seeking to correct these deficiencies when it established The Federal Reserve System. 3 This chapter will begin with the clash of views involved in the establish- ment of The Federal Reserve System and will then examine the emergence of factions espousing differing views of the system's role and power. It will be concerned particularly with its operation during the war, the views of it held by Herbert Hoover, the debate over its role in the slump of 1920, and the growing influence of Benjamin Strong and the FRBNY within the system.
- Peter Conti-Brown(Author)
- 2017(Publication Date)
- Princeton University Press(Publisher)
14The system would not, in theory at least, be dominated by either public board or private bank. The emphasis, at least to some of these early legislative framers, was on the federal in The Federal Reserve System. That emphasis meant that the balance of power was between local and national figures, much as the U.S. Constitution had done with states and national governments. That balance was at the core of Glass’s conception of the new system. “In the United States, with its immense area, numerous natural divisions, still more numerous competing divisions, and abundant outlets to foreign countries,” he said, “there is no argument, either of banking theory or of expediency, which dictates the creation of a single central banking institution, no matter how skillfully managed, how carefully controlled, or how patriotically conducted.” To that end, The Federal Reserve System was “modeled upon our Federal political system. It establishes a group of independent but affiliated and sympathetic sovereignties, working on their own responsibility in local affairs, but united in National affairs by a superior body which is conducted from the National point of view.” To drive the point home: “The regional banks are the states and The Federal Reserve Board is the Congress.”15Glass’s view was of The Federal Reserve System as a series of central banks. He was, in fact, a steadfast defender of the Reserve Banks anytime the board sought to assert itself in the power struggles that arose. Glass wasn’t alone in this emphasis. E. W. Kemmerer, an early observer of the creation of the Fed, called the arrangement of “twelve central banks with comparatively few branches instead of one central bank with many branches” the “most striking fact” about the system. Wilson also agreed: “We have purposely scattered the regional reserve banks and shall be intensely disappointed if they do not exercise a very large measure of independence.”16
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