{"id":6826,"date":"2017-07-21T15:15:51","date_gmt":"2017-07-21T15:15:51","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/hccs-macroeconomics-3\/?post_type=chapter&p=6826"},"modified":"2017-08-08T01:55:14","modified_gmt":"2017-08-08T01:55:14","slug":"the-federal-reserve-system","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/hccs-macroeconomics-3\/chapter\/the-federal-reserve-system\/","title":{"raw":"The Federal Reserve System","rendered":"The Federal Reserve System"},"content":{"raw":"

The Central Bank of the United States<\/h1>\r\n \r\n\r\n\r\n\r\n
 \r\n\r\nThe Federal Reserve System<\/strong> is the central bank of the United States. It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest. The Federal Reserve\r\n\r\n\u2022 conducts the nation\u2019s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;\r\n\r\n\u2022 promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;\r\n\r\n\u2022 promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;\r\n\r\n\u2022 fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and\r\n\r\n <\/td>\r\n \r\n\r\n\"\"<\/a>\r\n\r\n\u2022\u00a0promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.\r\n\r\nExcerpts from\u00a0'About the FED' from the FED<\/a><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

Structure\/Organization of the Federal Reserve<\/h2>\r\nUnlike most central banks, the Federal Reserve is semi-decentralized, mixing government appointees with representation from private-sector banks. At the national level, it is run by a Board of Governors, consisting of seven members appointed by the President of the United States and confirmed by the Senate. Appointments are for 14-year terms and they are arranged so that one term expires January 31 of every even-numbered year. The purpose of the long and staggered terms is to insulate the Board of Governors as much as possible from political pressure so that policy decisions can be made based only on their economic merits. Additionally, except when filling an unfinished term, each member only serves one term, further insulating decision-making from politics. Policy decisions of the Fed do not require congressional approval, and the President cannot ask for the resignation of a\u00a0Federal Reserve Governor as the President can with cabinet positions.\r\n\r\n\r\n\r\n
 \r\n\r\nChair of the Federal Reserve Board<\/strong>\r\n\r\nOne member of the Board of Governors is designated as the Chair. For example, from 1987 until early 2006, the Chair was Alan Greenspan. From 2006 until 2014, Ben Bernanke held the post. The current Chair, Janet Yellen, has been described in the media as \u201cperhaps the most qualified Fed chair in history.\u201d\r\n\r\nThe Fed Chair is first among equals on the Board of Governors. While he or she has only one vote, the Chair controls the agenda, and is the public voice of the Fed, so he or she has more power and influence than one might expect.\r\n

Visit this\u00a0website<\/a>\u00a0to see who the current members of the Federal Reserve Board of Governors are. You can follow the links provided for each board member to learn more about their backgrounds, experiences, and when their terms on the board will end.<\/p>\r\n\"QR<\/span><\/td>\r\n

\r\n
\"This<\/span>
Janet L. Yellen is the first woman to hold the position of Chair of the Federal Reserve Board of Governors. (Credit: Board of Governors of the Federal Reserve System)<\/figcaption><\/figure>\r\n \r\n

Excerpts from\u00a0'About the FED' from the FED<\/a><\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\n\r\n\r\n
\"\"<\/td>\r\n \r\n\r\nThe framers of the Federal Reserve Act purposely rejected the concept of a single central bank. Instead, they provided for a central banking \u201csystem\u201d with three outstanding features: (1) a central governing Board, (2) a decentralized operating structure of 12 Reserve Banks, and (3) a combination of public and private characteristics.<\/span>\r\n\r\nThere are three key entities in the Federal Reserve System: the Board of Governors, the Federal Reserve Banks (Reserve Banks), and the Federal Open Market Committee (FOMC). The Board of Governors, an agency of the federal government that reports to and is directly accountable to Congress (figure 1.2), provides general guidance for the System and oversees the 12 Reserve Banks.\r\n\r\nExcerpts from\u00a0'About the FED' from the FED<\/a><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\n\r\n\r\n
 \r\n\r\nThe Decentralized System Structure and Its Philosophy<\/strong>\r\n\r\nIn establishing the Federal Reserve System, the United States was divided geographically into 12 Districts, each with a separately incorporated Reserve Bank. \u00a0(figure 1.3).\r\n\r\nPursuant to the Federal Reserve Act, each of the 12 Reserve Banks is separately incorporated and has a nine-member board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District\u2019s Reserve Bank and elect six of the Reserve Bank\u2019s directors; three remaining directors are appointed by the Board of Governors.\r\n\r\nDirectors serve as a link between the Federal Reserve and the private sector. \u00a0Reserve Bank head-office and Branch directors contribute to the System\u2019s overall understanding of the economy.\r\n\r\nExcerpts from\u00a0'About the FED' from the FED<\/a><\/td>\r\n\"\"<\/a><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\n\r\n\r\n
\"\"<\/a><\/td>\r\n \r\n\r\nThe Federal Reserve is not funded by congressional appropriations. Its operations are financed primarily from the interest earned on the securities it owns\u2014securities acquired in the course of the Federal Reserve\u2019s open market operations. The fees received for priced services provided to depository institutions\u2014such as check clearing, funds transfers, and automated clearinghouse operations\u2014are another source of income; this income is used to cover the cost of those services. After payment of expenses and transfers to surplus (limited to an aggregate of $10 billion), all the net earnings of the Federal Reserve Banks are transferred to the U.S. Treasury (figure 1.4).\r\n\r\nExcerpts from\u00a0'About the FED' from the FED<\/a><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n

In making decisions about the money supply, a central bank decides whether to raise or lower\u00a0interest rates<\/span>\u00a0and, in this way, to influence macroeconomic policy, whose goal is low\u00a0unemployment<\/span>\u00a0and low\u00a0inflation<\/span>.<\/p>\r\n\r\n

\r\n
<\/figcaption><\/figure>\r\n<\/section>
\r\n

What Does a Central Bank Do?<\/h1>\r\n

The Federal Reserve, like most central banks, is designed to perform three important functions:<\/p>\r\n\r\n

\r\n
To conduct monetary policy<\/div>\r\n
To promote stability of the financial system<\/div>\r\n
To provide banking services to commercial banks and other depository institutions, and to provide banking services to the federal government.<\/div>\r\n<\/div>\r\n

The first two functions are sufficiently important that we will discuss them in their own modules; the third function we will discuss here.<\/p>\r\n

The Federal Reserve provides many of the same services to banks as banks provide to their customers. For example, all commercial banks have an account at the Fed where they deposit reserves. Similarly, banks can obtain loans from the Fed through the \u201cdiscount window\u201d facility<\/span>, which will be discussed in more detail later. The Fed is also responsible for check processing<\/span>. When you write a check, for example, to buy groceries, the grocery store deposits the check in its bank account. Then, the physical check (or an image of that actual check) is returned to your bank, after which funds are transferred from your bank account to the account of the grocery store. The Fed is responsible for each of these actions.<\/p>\r\n

On a more mundane level, the Federal Reserve ensures that enough currency and coins are circulating through the financial system to meet public demands. For example, each year the Fed increases the amount of currency available in banks around the Christmas shopping season and reduces it again in January.<\/p>\r\n

Finally, the Fed is responsible for assuring that banks are in compliance with a wide variety of consumer protection laws. For example, banks are forbidden from discriminating on the basis of age, race, sex, or marital status. Banks are also required to disclose publicly information about the loans they make for buying houses and how those loans are distributed geographically, as well as by sex and race of the loan applicants.<\/p>\r\n\r\n<\/section>

\r\n

Key Concepts and Summary<\/h1>\r\n

The most prominent task of a central bank is to conduct monetary policy, which involves changes to interest rates and credit conditions, affecting the amount of borrowing and spending in an economy. Some prominent central banks around the world include the U.S. Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England.<\/p>\r\n\r\n<\/section>","rendered":"

The Central Bank of the United States<\/h1>\n

 <\/p>\n\n\n\n
 <\/p>\n

The Federal Reserve System<\/strong> is the central bank of the United States. It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest. The Federal Reserve<\/p>\n

\u2022 conducts the nation\u2019s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;<\/p>\n

\u2022 promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;<\/p>\n

\u2022 promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;<\/p>\n

\u2022 fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and<\/p>\n

 <\/td>\n

 <\/p>\n

\"\"<\/a><\/p>\n

\u2022\u00a0promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.<\/p>\n

Excerpts from\u00a0‘About the FED’ from the FED<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Structure\/Organization of the Federal Reserve<\/h2>\n

Unlike most central banks, the Federal Reserve is semi-decentralized, mixing government appointees with representation from private-sector banks. At the national level, it is run by a Board of Governors, consisting of seven members appointed by the President of the United States and confirmed by the Senate. Appointments are for 14-year terms and they are arranged so that one term expires January 31 of every even-numbered year. The purpose of the long and staggered terms is to insulate the Board of Governors as much as possible from political pressure so that policy decisions can be made based only on their economic merits. Additionally, except when filling an unfinished term, each member only serves one term, further insulating decision-making from politics. Policy decisions of the Fed do not require congressional approval, and the President cannot ask for the resignation of a\u00a0Federal Reserve Governor as the President can with cabinet positions.<\/p>\n\n\n\n
 <\/p>\n

Chair of the Federal Reserve Board<\/strong><\/p>\n

One member of the Board of Governors is designated as the Chair. For example, from 1987 until early 2006, the Chair was Alan Greenspan. From 2006 until 2014, Ben Bernanke held the post. The current Chair, Janet Yellen, has been described in the media as \u201cperhaps the most qualified Fed chair in history.\u201d<\/p>\n

The Fed Chair is first among equals on the Board of Governors. While he or she has only one vote, the Chair controls the agenda, and is the public voice of the Fed, so he or she has more power and influence than one might expect.<\/p>\n

Visit this\u00a0website<\/a>\u00a0to see who the current members of the Federal Reserve Board of Governors are. You can follow the links provided for each board member to learn more about their backgrounds, experiences, and when their terms on the board will end.<\/p>\n

\"QR<\/span><\/td>\n

\n
\"This<\/span>
Janet L. Yellen is the first woman to hold the position of Chair of the Federal Reserve Board of Governors. (Credit: Board of Governors of the Federal Reserve System)<\/figcaption><\/figure>\n

 <\/p>\n

Excerpts from\u00a0‘About the FED’ from the FED<\/a><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n\n
\"\"<\/td>\n <\/p>\n

The framers of the Federal Reserve Act purposely rejected the concept of a single central bank. Instead, they provided for a central banking \u201csystem\u201d with three outstanding features: (1) a central governing Board, (2) a decentralized operating structure of 12 Reserve Banks, and (3) a combination of public and private characteristics.<\/span><\/p>\n

There are three key entities in the Federal Reserve System: the Board of Governors, the Federal Reserve Banks (Reserve Banks), and the Federal Open Market Committee (FOMC). The Board of Governors, an agency of the federal government that reports to and is directly accountable to Congress (figure 1.2), provides general guidance for the System and oversees the 12 Reserve Banks.<\/p>\n

Excerpts from\u00a0‘About the FED’ from the FED<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n\n
 <\/p>\n

The Decentralized System Structure and Its Philosophy<\/strong><\/p>\n

In establishing the Federal Reserve System, the United States was divided geographically into 12 Districts, each with a separately incorporated Reserve Bank. \u00a0(figure 1.3).<\/p>\n

Pursuant to the Federal Reserve Act, each of the 12 Reserve Banks is separately incorporated and has a nine-member board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District\u2019s Reserve Bank and elect six of the Reserve Bank\u2019s directors; three remaining directors are appointed by the Board of Governors.<\/p>\n

Directors serve as a link between the Federal Reserve and the private sector. \u00a0Reserve Bank head-office and Branch directors contribute to the System\u2019s overall understanding of the economy.<\/p>\n

Excerpts from\u00a0‘About the FED’ from the FED<\/a><\/td>\n

\"\"<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n\n
\"\"<\/a><\/td>\n <\/p>\n

The Federal Reserve is not funded by congressional appropriations. Its operations are financed primarily from the interest earned on the securities it owns\u2014securities acquired in the course of the Federal Reserve\u2019s open market operations. The fees received for priced services provided to depository institutions\u2014such as check clearing, funds transfers, and automated clearinghouse operations\u2014are another source of income; this income is used to cover the cost of those services. After payment of expenses and transfers to surplus (limited to an aggregate of $10 billion), all the net earnings of the Federal Reserve Banks are transferred to the U.S. Treasury (figure 1.4).<\/p>\n

Excerpts from\u00a0‘About the FED’ from the FED<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

In making decisions about the money supply, a central bank decides whether to raise or lower\u00a0interest rates<\/span>\u00a0and, in this way, to influence macroeconomic policy, whose goal is low\u00a0unemployment<\/span>\u00a0and low\u00a0inflation<\/span>.<\/p>\n

\n
<\/figcaption><\/figure>\n<\/section>\n
\n

What Does a Central Bank Do?<\/h1>\n

The Federal Reserve, like most central banks, is designed to perform three important functions:<\/p>\n

\n
To conduct monetary policy<\/div>\n
To promote stability of the financial system<\/div>\n
To provide banking services to commercial banks and other depository institutions, and to provide banking services to the federal government.<\/div>\n<\/div>\n

The first two functions are sufficiently important that we will discuss them in their own modules; the third function we will discuss here.<\/p>\n

The Federal Reserve provides many of the same services to banks as banks provide to their customers. For example, all commercial banks have an account at the Fed where they deposit reserves. Similarly, banks can obtain loans from the Fed through the \u201cdiscount window\u201d facility<\/span>, which will be discussed in more detail later. The Fed is also responsible for check processing<\/span>. When you write a check, for example, to buy groceries, the grocery store deposits the check in its bank account. Then, the physical check (or an image of that actual check) is returned to your bank, after which funds are transferred from your bank account to the account of the grocery store. The Fed is responsible for each of these actions.<\/p>\n

On a more mundane level, the Federal Reserve ensures that enough currency and coins are circulating through the financial system to meet public demands. For example, each year the Fed increases the amount of currency available in banks around the Christmas shopping season and reduces it again in January.<\/p>\n

Finally, the Fed is responsible for assuring that banks are in compliance with a wide variety of consumer protection laws. For example, banks are forbidden from discriminating on the basis of age, race, sex, or marital status. Banks are also required to disclose publicly information about the loans they make for buying houses and how those loans are distributed geographically, as well as by sex and race of the loan applicants.<\/p>\n<\/section>\n

\n

Key Concepts and Summary<\/h1>\n

The most prominent task of a central bank is to conduct monetary policy, which involves changes to interest rates and credit conditions, affecting the amount of borrowing and spending in an economy. Some prominent central banks around the world include the U.S. Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England.<\/p>\n<\/section>\n\n\t\t\t

\n\t\t\t

Candela Citations<\/h3>\n\t\t\t\t\t
\n\t\t\t\t\t\t
\n\t\t\t\t\t\t\t
CC licensed content, Shared previously<\/div>