Much of the information in the lecture comes from The Federal Reserve's web page. The page is an excellent source for learning about how the Federal Reserve (Fed) affects our economy. The Fed is the most important economic player in the world. The Fed controls the money supply and credit conditions in the United States, which in turn has a major impact on the global economy. The Fed is "quasi governmental". The Federal Reserve is privately owned. It develops policy positions independently of the federal government after presidential appointments of certain key members. The Chairman of the Board of Governors and of the main policy determining committee is Alan Greenspan.
you desire more information than is contained in this lecture or than is
available at the Federal Reserve's web page, you may order The
Federal Reserve System: Purposes and Functions from the Federal Reserve
or may access an Adobe Acrobat file at the Fed's web page. This book
is an excellent introduction to the Fed.
The Federal Reserve, the central bank of the United States, was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.
Today the Federal Reserve's duties fall into four general areas:
According the Federal Reserve, what four general areas comprise the Federal Reserve's duties?
Board of Governors of the Federal Reserve System
On December 23, 1913, the Federal Reserve System, which serves as the nation's central bank, was created by an Act of Congress. The System consists of
Only one member of the Board may be selected from any one of the twelve Federal Reserve Districts. In making appointments, the President is directed by law to select a "fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country." These aspects of selection are intended to ensure representation of regional interests and the interests of various sectors of the public.
The primary responsibility of the Board members is the formulation of monetary policy. The seven Board members constitute a majority of the 12 member Federal Open Market Committee (FOMC), the group that makes the key decisions affecting the cost and availability of money and credit in the economy. The other five members of the FOMC are Reserve Bank presidents, one of whom is the president of the Federal Reserve Bank of New York. The other Bank presidents serve one year terms on a rotating basis. By statute the FOMC determines its own organization, and by tradition it elects the Chairman of the Board of Governors as its Chairman and the President of the New York Bank as its Vice Chairman.
The monetary policy tools of the Federal Reserve System
In addition, the Board plays a key role in assuring the smooth functioning and continued development of the nation's vast payments system .
Another area of Board responsibility is the development and administration of regulations that implement major federal laws governing consumer credit such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Truth in Savings Act .
The Board usually meets several times a week. Meetings are conducted in compliance with the Government in the Sunshine Act, and many meetings are open to the public. If the Board has convened to consider confidential financial information, however, the sessions are closed to public observation.
Contacts within Government
As they carry out their duties, members of the Board routinely confer with officials of other government agencies, representatives of banking industry groups, officials of the central banks of other countries, members of Congress and academicians. For example, they meet frequently with Treasury officials and the Council of Economic Advisers to help evaluate the economic climate and to discuss objectives for the nation's economy. Governors also discuss the international monetary system with central bankers of other countries and are in close contact with the heads of the U.S. agencies that make foreign loans and conduct foreign financial transactions.
Regional Federal Reserve Banks
The map below gives the location of the twelve district Federal Reserve banks
The Federal Open Market Committee
The Federal Open Market Committee (FOMC) is the most important monetary policy making body of the Federal Reserve System. It is responsible for formulation of a policy designed to promote:
The FOMC is composed of the seven members of the Board of Governors and five Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves on a continuous basis; the presidents of the other Reserve Banks serve one year terms on a rotating basis beginning January 1 of each year. Rotation is such that each year one member is elected to the Committee by the boards of directors of Reserve Banks in each of the following groups: (1) Boston, Philadelphia, and Richmond; (2) Cleveland and Chicago; (3) Atlanta, St. Louis, and Dallas; and (4) Minneapolis, Kansas City, and San Francisco.
By statute, the FOMC determines its own organization. Each year at its first meeting, the Committee elects its Chairman and Vice Chairman and selects staff officers to serve the Committee for the coming year. Traditionally, the Chairman of the Board of Governors is elected Chairman and the president of the Federal Reserve Bank of New York is elected Vice Chairman. Staff officers are selected from among the officers and employees of the Board of Governors and the Federal Reserve Banks.
By law, the FOMC must meet at least four times each year in Washington, D.C. Since 1980, eight regularly scheduled meetings have been held each year at intervals of five to eight weeks. If circumstances require consultation or consideration of an action between these regular meetings, members may be called on to participate in a special meeting or a telephone conference, or to vote on a proposed action by telegram or telephone. At each regularly scheduled meeting, the Committee votes on the policy to be carried out during the interval between meetings. At least twice a year, the Committee also votes on its long-run policy objectives for growth in key money and debt aggregates.
Attendance at meetings is restricted because of the confidential nature of the information discussed, and is limited to Committee members, nonmember Reserve Bank presidents, staff officers, the Manager of the System Open Market Account, and a small number of Board and Reserve Bank staff.
The Decision Making Process
Before each regularly scheduled meeting of the FOMC, System staff prepare written reports on past and prospective economic and financial developments which are sent to Committee members and to nonmember Reserve Bank presidents. Reports prepared by the Manager of the System Open Market Account on operations in the domestic open market and in foreign currencies since the last regular meeting are also distributed. At the meeting itself, staff officers present oral reports on the current and prospective business situation, on conditions in financial markets, and on international financial developments. In its discussions, the Committee considers such factors as trends in prices and wages, employment and production, consumer income and spending, residential and commercial construction, business investment and inventories, foreign exchange markets, interest rates, money and credit aggregates, and fiscal policy. The Manager of the System Open Market Account also reports on account transactions since the previous meeting.
After these reports, the Committee members and other Reserve Bank presidents turn to policy. Typically, each participant expresses his or her own views on the state of the economy and prospects for the future, and on the appropriate direction for monetary policy. Then each makes a more explicit recommendation on policy for the coming inter meeting period (and for the longer run, if under consideration). Finally, the Committee must reach a consensus regarding the appropriate course for policy, which is incorporated in a directive to the Federal Reserve Bank of New York—the Bank which executes transactions for the System Open Market Account. The directive is cast in terms designed to provide guidance to the Manager in the conduct of day today open market operations. The directive sets forth the Committee's objectives for long-run growth of certain key monetary and credit aggregates. It also sets forth operating guidelines for the degree of ease or restraint to be sought in reserve conditions and expectations with regard to short-term rates of growth in the monetary aggregates. Policy is implemented with emphasis on supplying reserves in a manner consistent with these objectives and with the nation's broader economic objectives.
Effects of Policy
Depository institutions are required to maintain reserves in certain proportions against various types of their checkable deposits. Open market operations directly affect the level of reserves in the banking system. Federal Reserve purchases of securities add to reserves; sales withdraw reserves from the System. If reserves increase, depository institutions will generally acquire new loans and investments, which will tend to exert downward pressure on interest rates.
Open market operations as directed by the FOMC are the major tool used to influence the total amount of money and credit available in the economy. The Federal Reserve attempts to provide enough reserves to encourage expansion of money and credit in keeping with the goals of price stability and sustainable growth in economic activity.
By law, the Board of Governors must keep a record of the actions taken by the FOMC on all questions of policy and to include in its annual report to Congress the vote on and reasons for each action. To provide this information on a timely basis, minutes are prepared after each meeting and are released to the public a few days after the next regularly scheduled FOMC meeting.
Twice a year, as required in the Full Employment and Balanced Growth (Humphrey-Hawkins) Act of 1978, the Board submits a written report to Congress on the state of the economy and the course of monetary policy, and the Chairman is called on to testify on this report.
[Some of the remainder of the lecture is redundant with the above information which was gleaned from the Federal Reserve's web site. The material below comes from my lecture notes which have been developed over the years]
The Federal Reserve's Policy Tools
used by the Fed to adjust the reserves of the banking system to influence money and credit
Legal Required Reserves
rules that state the amount of reserves depository institutions must keep on hand to back bank deposits
Banks which keep reserves with the Fed may borrow from the Fed if the individual bank does not have enough reserves to meet requirements at the end of the business day. The bank is said to go to the "discount window".
the discount rate is the rate of interest the Fed charges for these loans
Open Market Operations
purchases and sales of federal government securities by the Fed as directed by the FOMC to control the money supply
Policy decisions are made by the FOMC and are carried out by the New York branch.