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FOMC History
The Federal Reserve
The Federal Reserve System serves as the Central Bank of the Unites States. It 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:
•Conducting the nation's monetary policy by influencing the money and credit conditions in the economy in pursuit of full employment and stable prices
•Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
•Maintaining the stability of the financial system and containing systematic risk that may arise in the financial markets
•Providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions
History of the Federal Reserve
Before Congress created the Federal Reserve System, periodic financial troubles had plagued the nation. These financial problems caused many bank failures, business bankruptcies and general economic strife. After a particularly severe economic crisis in 1907, Congress established the National Monetary Commission, which was created to develop an institution that would concentrate on guiding economic policy. After much debate, Congress passed the Federal Reserve Act, which President Woodrow Wilson signed into law on December 23, 1913. The act stated that its purposes were "to provide for the establishment of federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, and establish a more effective supervision of banking in the United States."
Structure of the Federal Reserve
Congress designed the Federal Reserve System to have a broad perspective on the economic conditions in all parts of the nation. The Federal Reserve is made up of the Board of Governors and twelve regional Reserve Banks. The Board of Governors is located in Washington, D.C. and the twelve regional banks are located in major cities throughout the nation.
Components of the Federal Reserve
The major policymaking arm of the Federal Reserve is the Federal Open Market Committee (FOMC). The FOMC is composed of the Board of Governors, the president of the Federal Reserve Bank of New York and presidents of four other Federal Reserve banks. The other two elements of the Federal Reserve are the depository institutions and advisory committees.
Monetary Policy of the Federal Reserve
The Federal Reserve uses three major tools to guide monetary policy:
•Open Market Operations
Open market operations consists of the buying and selling of U.S. government securities in the open market to manipulate the levels of reserves in the bank depository system. When the Fed wants to increase the flow of money and credit, it buys government securities; when it wants to restrict the flow of money and credit, it sells government securities, thus withdrawing money from the system. This is the most actively managed and most flexible tool available to the Fed to influence the level of reserves in the banking system. The Fed uses Open Market Operations to influence short-term interest rates, specifically the Federal Funds Rate.
•Reserve Requirements
Reserve requirements deals with the altering of the percentage of deposits that institutions must set aside as reserves. Lowering reserve requirements can lead to more money being inserted into the economy by releasing funds that were previously set aside in case of default. In contrast, raising the reserve requirement freezes funds that financial institutions could add to the economy.
This tool is a potent tool and is not used very often by the Fed.
•Discount Rate
The Discount rate is the interest charged commercial banks and other deposit institutions when they borrow reserves from a Federal Reserve Bank. It is important to note that the discount rate is an administered rate rather than a market interest rate like the Federal Funds Rate. Thus, the discount rate is usually a symbolic level since the Fed usually discourages banks from frequently borrowing from the Fed to cover reserve requirements.
The Federal Reserve is considered to be an independent central bank. The Fed decisions do not have to be ratified by the President or anyone in the executive branch. The Federal Reserve is subject to oversight by the U.S. Congress because the Constitution gives Congress the power to coin money and set its value.
With the Federal Reserve having so much power and breadth, many people have vastly different views of the Federal Reserve System. Here are a few examples:
•The Federal Reserve System was conceived in 1910 by a group of notorious robber barons at a then secret meeting at J.P. Morgan's estate.
•Henry Ford once said that if the people of this great nation were to know the truth about the Federal Reserve, there would be rioting in the streets in the morning.
While opinions on the nature of the government organization can differ, there is little question that the Fed's steady hand throughout the 1990's gave helped to usher in a period of unprecedented economic growth.
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