The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central bank of the United
States.
The Federal Reserve System is composed of a central Board of Governors in Washington, D.C. and twelve regional Federal Reserve Banks located in major cities throughout the nation. Alan Greenspan currently serves as the Chairman of the Board of Governors of Federal Reserve.
History
Main article: History of the Federal
Reserve
Chartered in 1791, the first institutions with responsibilities of a central bank in the
US were the First Bank of the United States and Second Bank of the United States. From
1837 to 1862, in the Free Banking Era there
was no formal central bank, while from 1862 to 1913,
a system of (private) national banks were in charge.
The Fed was created by the U.S.
Congress through the passing of the Owen-Glass Act,
signed by President Woodrow Wilson on December 23, 1913.
Roles and responsibilities
The main tasks of the Federal Reserve are:
- Supervise and Regulate banks
- Implement Monetary Policy by buying and selling U.S. Treasury Bonds
- Maintain a strong payments system
- Feds cannot issue U.S. Treasury Bonds
Other tasks include:
- Economic education
- Community outreach
- Economic research
Organization of the Federal Reserve
The Federal Reserve is comprised of a board of governors. The 7 members of the board are appointed by the President and confirmed by the Senate. Members are elected to terms of 14 years, with the ability
to serve for no more than one term. A governor may serve the remainder of another governor's term in addition to their own full
term. The Federal Open Market Committee
(FOMC) comprises the 7 members of the board of governors and 5 representatives selected from the Federal Reserve Banks. The representative from the 2nd District,
New York, is a permanent member, while the rest of the banks rotate on
two and three year intervals.
The current members of the Board of Governors are:
Interest rates
The Fed implements monetary policy largely by steering the federal funds rate, also called the overnight rate, using open market operations. This is the interest rate that banks charge each other for overnight loans
to each other. This in turn influences the prime rate which is usually about 3 percentage points higher than the federal funds rate.
This prime rate is the rate that most banks price their loans at for their best customers.
Lower interest rates stimulate economic activity by lowering the cost of borrowing, making it easier for consumers and
businesses to buy and build. Higher interest rates slow the economy by increasing the cost of borrowing. (See monetary policy for a fuller explanation.)
The Fed usually adjusts the federal funds rate by 0.25 or 0.50 percentage points at a time. From early 2001 to mid 2003 the Fed lowered its interest rates 13 times, from 6.25 to
1.00 percent, to fight recession. In November 2002, rates were cut to 1.75, and many interest rates went below
the inflation rate. On June 25,
2003, the federal funds rate was lowered to 1.00 percent, its lowest nominal rate since
July, 1958, when the overnight rate averaged 0.68 percent. Starting at the end of June, 2004, the Fed started to raise the target
interest rate in response to concerns about the potential for increased inflation from a too-active economy. As of December,
2004, the rate is at 2.25 percent following a series of small increments.
Who owns the Federal Reserve?
The Federal Reserve claims that nobody owns it – that it is an “independent entity within the government.”
The Federal Reserve is subject to laws such as the Freedom of Information Act and the Privacy Act which cover Federal agencies but not private corporations; yet Congress gave the
Federal Reserve the autonomy to carry out its responsibilities insulated from political pressure. Each of the Fed's three parts
– the Board of Governors, the regional Reserve banks and the Federal Open Market Committee – operates independently
of the federal government to carry out the Fed's core responsibilities. Once a member of the Board of Governors is appointed, he
or she can be as independent as a U.S. Supreme Court judge,
though the term is shorter.
Influence of Government
As the nation's central bank, the Federal Reserve derives its authority from the US Congress. It is considered an independent central bank because its decisions do not
have to be ratified by the President or
anyone else in the executive or legislative branch of government, it does not receive funding appropriated by the Congress, and the terms of
the members of the Board of Governors span multiple presidential and congressional terms. The Fed's financial independence arises
because it is hugely profitable, among others, due to its ownership of government bonds. It returns billions of dollars to the government each year. However, the Federal Reserve
is subject to oversight by the Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives
of economic and financial policy established by the government.
The Reserve Banks
The twelve regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation's
central banking system, are organized much like private corporations—possibly leading to some confusion about
“ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock
is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a
certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold or traded or pledged as
security for a loan; dividends are, by law, limited to 6 percent per year.[1] (http://minneapolisfed.org/info/sys/faq/frs.cfm#3)
The Federal Reserve System was created via the Federal Reserve Act of 1913 which "established a new central bank designed to
add both flexibility and strength to the nation's financial system. The legislation provided for a system that included a number
of regional Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks
could join. The Reserve Banks opened for business in November 1914. Congress created Federal Reserve notes to provide the nation
with an elastic supply of currency. The notes were to be issued to Reserve Banks for subsequent transmittal to banking
institutions in accordance with the needs of the public.
Money creation and fractional reserve banking
Money creation: The regulation of the creation of new money
in the economy by commercial and central banks.
Fractional reserve banking: The
common practice by banks of retaining only a fraction of their deposits to satisfy demands for withdrawals, lending the remainder
at interest to obtain income that can be used to pay interest to depositors and provide profits for the banks' owners.
Criticism
Main article: Criticism of the
Federal Reserve
Criticism of the federal reserve include what may be general critisism of a central bank system, for example that it cartelizes the
banking industry and monopolizes the creation of money. And what may be
specific federal reserve criticism, that it profits illegally, and causes inflation.
Further reading
- Greider, William (1987). Secrets of the Temple. Simon & Schuster. ISBN 0671675567; a book intended for lay
readers explaining the structures, functions, and history of the Federal Reserve.
- Epstein, Lita & Martin, Preston (2003). The Complete Idiot's Guide to the Federal Reserve. Alpha Books. ISBN 0028643232.
- Meyer, Lawrence H (2004). A Term at the Fed : An Insider's View. HarperBusiness. ISBN 0060542705.
- Rothbard, Murray N. (1994). The Case Against the Fed. Ludwig Von Mises Institute. ISBN 094546617X.
Money supply
Open Market Operations
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