STRUCTURE OF THE FED

FED

Federal Reserve Bankswere established by Congress as the operating arms of the nation’s central banking system. Many of the services provided by this network to depository institutions and the government are similar to services provided by banks and thrift institutions to business customers and individuals.

One of the most important functions of the Fed is to conduct monetary policy—changes in the money supply in order to affect the availability and cost of credit. This in turn influences economic activity. When the Fed conducts its monetary policy, it changes interest rates by changing the size of the money supply. Under an easy money policy,the Fed expands the money supply, causing interest rates to fall. Such a policy stimulates the economy because people borrow more at lower interest rates. Under a tight money policy,the Fed restricts the size of the money supply. This tends to slow economic growth because higher interest rates normally encourage everyone to borrow and spend less. The Fed can use three major tools to conduct monetary policy. Each tool works in a different way to change the amount of excess reserves—the amount of money bank can lend to others.

The first tool of monetary policy is the reserve requirement. Within limits that Congress sets, the Fed can change this requirement for all checking, time, and savings accounts. The second tool of monetary policy is open market operations—the buying and selling of government securities in financial markets. This method is the Fed’s most popular tool and allows the Fed to influence short-term interest rates. As a central bank, the Fed makes loans to other depository institutions. The discount rate—the interest the Fed charges on loans to financial institutions—is the third major tool of monetary policy. Only financial institutions can borrow from the Fed. While the Fed directly sets only one interest rate—the discount rate—its monetary policy actions influence other interest rates. For example, changes can directly affect the prime rate—the lowest rate of interest commercial banks charge their best customers.

The Federal Reserve has other responsibilities as well. These include maintaining the money supply and the payments system, regulating and supervising banks, preparing consumer legislation, and serving as the federal government’s bank.

So, today’s currency,the paper component of the money supply, is made up of Federal Reserve notes that are printed by the U.S. Bureau of Engraving and Printing. This currency is distributed to the Fed’s district banks for storage until it is needed by the public. The Bureau of the Mint produces coins. After the coins are minted, they are shipped to the Fed district banks for storage. When member banks need additional coins or currency, they contact the Fed to fulfill their needs.

The payments system involves more than the money supply. It also covers the electronic transfer of funds between businesses, state and local governments, financial institutions, and foreign central banks. In addition, specialized operations called clearinghouses process the billions of checks that are written every year. The Fed works with all of these agencies to ensure the payments system operates smoothly.

The Fed is responsible for establishing specific guidelines that govern banking behavior. It also has the responsibility for monitoring, inspecting, and examining various banking agencies to verify that they comply with existing banking laws.

The Fed is responsible for implementing some consumer legislation, such as the federal Truth in Lending Act, which requires sellers to make complete and accurate disclosures to people who buy on credit. Under Regulation Z,the Fed has the authority to extend truth-in-lending disclosures to millions of individuals who borrow from retail stores, automobile dealers, banks, and lending institutions. If you buy furniture or a car on credit, for example, you will discover that the seller must explain several items before you make the purchase. These items include the size of the down payment, the number and size of the monthly payments, and the total amount of interest over the life of the loan. All of the disclosures that the seller makes were determined by the Fed.

A final Fed function is the range of financial services it provides to the federal government and its agencies. For example, the Fed conducts nationwide auctions of Treasury securities. It also issues, services, and redeems these securities on behalf of the Treasury. In the process, it maintains numerous demand depos it accounts for the Treasury. The Fed also maintains accounts for the government. In fact, any check written to the U.S. Treasury is deposited in the Fed.

STRUCTURE OF THE FED

One of the unique features of the Fed is that it is privately owned by its member

banks. A member bankis a commercial bank that is a member of, and holds shares of stock in the Fed. National banks—those chartered by the national government— must belong to the Fed. State banks—those receiving their charters from state governments— have the choice to belong or not. Private individuals are not allowed to buy shares in the Fed, although they become indirect owners by buying shares of stock in a Fed-member bank.

Board of Governors

FigureThe Fed is directed by a seven-member Board of Governors. Each member is appointed by the president of the United States and approved by the Senate to serve a 14-year term of office. The Board is primarily a regulatory and supervisory agency. It sets general policies for its member banks to follow and regulates certain aspectsof state-chartered member banks’ operations. It helps make policies that affect the level of interest rates and the general availability of credit. Finally, it reports annually to Congress and puts out a monthly bulletin that covers national and international monetary matters.

District Banks

The Fed was originally intended to operate as a system of 12 independent and equally powerful banks. Each reserve bank was responsible for a district, and some Federal Reserve notes today still have the district bank’s name in the seal to the left of the portrait. Today the 12 Federal Reserve district banks and their branches are strategically located to be near the institutions they serve. The district banks provide many of the same functionsfor banks and depository institutions that banks provide for us. For example, the district banks accept deposits from, and make loans to, privately owned banks and thrift institutions.

Date: 2015-12-24; view: 1018