Federal Reserve System

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  Federal Reserve System (central banking system of the United States)

  • (Author)
  • 2014(Publication Date)
  • White Word Publications

    (Publisher)

  ____________________ WORLD TECHNOLOGIES ____________________ Chapter 1 Federal Reserve System Federal Reserve System Seal Federal Reserve System headquarters (Eccles Building) Headquarters Washington, D.C. Chairman Ben Bernanke Central bank of United States Currency United States dollar ISO 4217 Code USD Base borrowing rate 0%-0.25% The Federal Reserve System (also known as the Federal Reserve , and informally as The Fed ) is the central banking system of the United States. It was created in 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907. Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved. Events such as the Great Depression were major factors leading to changes in the system. Its duties today, according to official Federal Reserve documentation, are to conduct the nation's monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institutions, the U.S. government, and foreign official institutions. The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee ____________________ WORLD TECHNOLOGIES ____________________ (FOMC), twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils. The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time. The responsibilities of the central bank are divided into several separate and independent parts, some private and some public. The result is a structure that is considered unique among central banks.

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  Introduction 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.

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  Financial Markets & Institutions

  • 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.

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  The Independence of the Federal Reserve System

  • A. Jerome Clifford(Author)
  • 2016(Publication Date)
  • University of Pennsylvania Press Anniversary Collection

    (Publisher)

  Initially, perhaps, it manifested aloofness and indif-ference and even opposition. Later as the government ex-panded its own objectives in the economic life of the nation and set about broadening the powers and objectives of the Federal Reserve System as well as those of other government agencies, the Federal Reserve showed a new life and found a new place within the government. Its new vocation was par-ticularized in the phrases of President Roosevelt at the dedica-tion of the headquarters building of the Board of Governors in 1937 : I dedicate this building to progress toward the ideal of an America in which every worker will be able to provide his family at all times with an ever-increasing standard of comfort. 27 John H. Williams, The Implications of Fiscal Policy for Monetary Policy and the Banking System, The American Economic Review, X X X I I , No. 1, Supplement, Part 2 (March, 1942), p. 234. 148 THE INDEPENDENCE OF THE FEDERAL R E S E R V E S Y S T E M Increased Public Responsibility President Roosevelt certainly expected that the Federal Reserve System would use its monetary and banking powers for the promotion of the ideal which he had proposed. This objective was implicitly added to the Federal Reserve Act or was enacted in related laws in the Thirties. T h e Board was given the power to change reserve requirements for the pur-pose of preventing injurious credit expansion or contrac-tion ; :s in its regulation of stock market credit, the Board was to have due regard for the general credit situation of the country. The boards of directors of the Reserve Banks were enjoined to make sure their loan operations were con-sistent with the maintenance of sound credit conditions. 10 T h e Federal Open Market Committee's mandate required that the Committee carry out its operations with regard to their bearing upon the general credit situation of the coun-try.

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  Do They Walk on Water?

  Federal Reserve Chairmen and the Fed

  • Leonard J. Santow(Author)
  • 2008(Publication Date)
  • Praeger

    (Publisher)

  Nevertheless, up to this point, the monetary union has held together because there have been economic advantages to breaking down economic and political barriers that appear to offset mistakes, misjudgments, and questionable approaches to monetary policy. THE FEDERAL RESERVE When I was a graduate student and taught at the University of Illinois, the bible for studying the Federal Reserve was a book called The Federal Reserve System: Purposes and Functions. Its first printing was in May 1939, and the ninth printing 16 DO THEY WALK ON WATER? was in June 2005. The book was generally updated about every ten years, which frankly was not often enough. It was published by the Federal Reserve Bank of New York, and one can get the information contained in the book online at the New York Federal Reserve Bank site. It covers every aspect of the Federal Reserve System. There is another book published by the New York Federal Reserve Bank entitled: U.S. Monetary Policy & Financial Markets. Paul Meek wrote the first edition of this book in 1982 and it was updated in 1990. Because I had been involved in the gov- ernment securities business, I was one of a number of people asked to read a draft and make comments and suggestions. Ann-Marie Meulendyke wrote the expanded and updated 1998 edition. This book was far more detailed than the Purposes and Functions book, but if you studied both, you had a solid background on the Federal Reserve, its history, and its operations. Unfortunately, if you talk to most people who are currently involved in the debt markets in general, and the government market in particular, they are unaware of these two valuable sources of background information. Part of the reason is that in earlier days, government securities dealers were considered the centerpiece of the debt markets, and those involved in the markets wanted to know as much nitty-gritty about the Federal Reserve as possible.

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  Oracles, Heroes or Villains

  Economic Policymakers, National Politicians and the Power to Shape Markets

  • George E. Shambaugh(Author)
  • 2019(Publication Date)
  • Cambridge University Press

    (Publisher)

  4 The Federal Reserve Goes Political 4.1 The Federal Reserve Goes Political Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector. Ben Bernanke, Chairman of the Federal Reserve 1 In the wake of the recent financial crisis, Federal Reserve Chairman Ben Bernanke argued repeatedly that fostering healthy growth and job cre- ation required legislative action. 2 He warned that continued political battles over fiscal and monetary policy, financial regulation and the debt ceiling were “deeply irresponsible” and would have “catastrophic conse- quences for the economy that could last for decades.” 3 At the same time, like Alan Greenspan before him, Bernanke joined secretaries of the Treasury and other technocrats in guiding and enabling legislation, helping presidents outmaneuver critics and compensating for political uncertainty when political battles between the President and Congress stalled economic legislation. Far from being apolitical actors, these technocrats manipulated authority, exploited deference from politicians and business leaders, and alternately bolstered and challenged national politicians in order to shape US economic policy, manage market behav- ior and coordinate global activities before, during and after the recent financial crises. 4 1 B. Bernanke (2011b). “Economic Outlook and Recent Monetary Policy Actions.” Before the Joint Economic Committee, US Congress, Washington, DC. October 4. www.federalreserve.gov/newsevents/testimony/bernanke20111004a.htm. 2 Ibid. 3 Bernanke, B. S. (2012a). “The economic recovery and economic policy.” Speech at the Economic Club of New York. New York, November 20. www.federalreserve.gov/ newsevents/speech/bernanke20121120a.htm.

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  Central Bank Governance and Oversight Reform

  • John Cochrane, John B. Taylor, John Cochrane, John B. Taylor(Authors)
  • 2016(Publication Date)
  • Hoover Institution Press

    (Publisher)

  So as Bordo notes, the system was, is, and always will be a creature of legislative compromise, unless Ron Paul has his way, and we’re abolished. And I would note that Ron Paul has been arguing that from long before the most recent financial crisis.

  So that those who are interested in the Fed operate with a base of knowledge, I will contribute a few observations of my own about system governance. In my view, the structure of the Federal Reserve System ultimately reflects sensitivity to the problem of having a central monetary authority in a federal system of government and in a democratic system of government. So Congress to date has maintained a central bank that isn’t [central], as my friend and colleague Dave Wheelock has noted. And as Mike pointed out, it has an independent agency in D.C., the government part of the Fed. It has the financial center part of the Fed on Wall Street, and other Reserve Banks located throughout the country to preserve independent voices from Main Street.

  Where do we get our political accountability? Well, the independent agency in Washington has significant control over the operations of the Reserve Banks. And through that control, we remain accountable to the Board, the entity whose governors are subject to presidential appointments and Senate confirmation. So some examples of that control are found in the Federal Reserve Act. I think Mike mentioned general oversight and supervision of the Reserve Banks, which goes back to the beginning. Another power that goes back to the beginning is the power to remove any officer or director of the Reserve Bank. We all serve at the pleasure of the Board of Governors.

  Additionally, Reserve Banks’ powers were based on the powers of national banks under the National Banking Act. So as Mike noted, Dodd-Frank amended a provision to provide that only the Class B and C directors—those who may not be bankers—now appoint the Reserve Bank presidents and first vice presidents. This process illustrates again that the Fed is a creature of delicate balances. Those appointments have to be approved by the Board of Governors of the Federal Reserve System. Once again, the Reserve Bank Board is accountable to an authority that has political accountability directly as a federal agency.

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  Monetary Economics

  Policy and its Theoretical Basis

  • Keith Bain, Peter Howells(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  This brings us back to the question of independence from the financial sector since financial markets can be seen to be the only part of the economy capable of damaging the Fed in response to the Fed’s policies. Through their actions, the financial markets can make it much more difficult for the central bank to fulfil its mandate and can damage the reputations of central bankers. We have seen, in chapter 11, a good example of this in relation to the value of the euro. The result of this is that the central bank might well feel itself more accountable to financial Monetary policy in the USA 396 markets than to the political system. It is of interest in this regard that, as we report above, the Fed changed the way in which it expresses its views about the future prospects of the economy because of concern over the way in which its comments were being interpreted in the financial markets. This, of course, pro-vides another reason why the desire expressed in the constitution of the Fed when it was set up in 1913, that it should be independent of both private finan-cial business interests and duly constituted government authorities might not, in practice, be possible. 12.5 The Federal Reserve — monetary policy, 2000-2008 Background 1991-2000 The decade of the 1990s had started with interest rates relatively high. At the beginning of July 1990, the target Fed Funds rate stood at 8.25 per cent. The early 1990s, however, saw a downturn in all developed economies and the Fed set out on a long series of interest cuts, which saw the target rate fall sharply. In 1991, the Fed was extraordinarily active, making 10 cuts in the intended Fed Funds rate, bringing it down from 7 per cent to 4 per cent. That is, the FOMC not only cut the interest rate at each of its eight regular meetings, but also made further reduc-tions in two special telephone linkups.

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  The Power of Collective Purse Strings

  The Effect of Bank Hegemony on Corporations and the State

  • Davita Silfen Glasberg(Author)
  • 2023(Publication Date)
  • University of California Press

    (Publisher)

  Chapter One The Importance of Financial Institutions in the Political Economy [Banks are] . . . in a position where they can exert sig- nificant influence . . . on corporate decisions and poli- cies. . . . [L]argely unknown is the extent to which these institutions actually use the power . . . to influence cor- porate decisions. —Julius W. Allen, Library of Congress The international financial system is not separable from our domestic banking and credit system. . . . A shock to one would be a shock to the other. In that very real sense we are not considering esoteric matters of international finance. . . . We are talking about dealing with a threat to the recovery, the jobs, and the prosperity of our own country. —Paul A. Volcker, Chairman of the Federal Reserve Observers have long recognized the power of individual banks to advance or deny loans to industrial corporations (Hobson 1905; Hilferding 1 9 1 0 ; Lenin 1 9 1 7 ; Menshikov 1969; Fitch and Oppen- heimer 1970; Kotz 1978). Yet the processes and effects of banks' collective control of capital flows remain murky. What happens when an industrial corporation faces an organized financial com- munity? National and local governments throughout the world 1 1 The Power of Collective Purse Strings imitate corporations by borrowing to finance various projects. What happens when the state confronts an internationally orga- nized banking community? What is the effect on the state's relative autonomy? Do state capital flow relations look like those in the corporate community? Many observers and theorists have offered intriguing speculations about these issues, but no one has system- atically substantiated them. This book explores what happens to corporations and governments when the banking community pulls the collective purse strings. It uses comparative case studies that together provide a broader perspective than would each alone.

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