Federal Reserve Bank

Federal Reserve Bank
Federal Reserve Bank. The Fed is an organization of 12 regional Federal Reserve Banks headed by a Board of Governors. The Chairman and Vice Chairman are appointed for four years, while the remaining five governors are appointed for 14 years. The Fed’s actions do not require presidential or congressional approval, an attempt to free the members from political pressure.

The Federal Open Market Committee (FOMC) is comprised of the Board of Governors, the President of the Federal Reserve Bank of New York, and the Presidents of four other Federal Reserve Banks who serve on a rotating basis. The FOMC makes many of the monetary policy decisions.

As detailed in the Federal Reserve Act, the Fed’s goals when setting monetary policies are “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Monetary policy is implemented through three main methods:

Purchasing or selling U.S. Treasury securities in the open market. If the Fed wants to increase reserves at member banks so more funds are available to lend to customers, it purchases government securities in the open market, paying for the securities with a Federal Reserve check. Since this check is not issued by a commercial bank, the entire banking system has more funds available when the check is deposited in a commercial bank. To reduce the supply of funds, the Federal Reserve sells government securities, getting paid with a check drawn on a commercial bank. When the check is deposited in the Federal Reserve, the money is essentially taken out of circulation.

Federal Reserve Bank. Changing the reserve requirements. Each bank is required to keep a certain percentage of deposits on hand, which cannot be loaned out. Changing the requirements allows the Fed to change, on a large scale, the amount of money available. These requirements, however, are not frequently changed.

Raising or lowering the discount rate. The discount rate is the interest rate the Fed charges on loans it makes to banks. Lowering the rate makes it less expensive for banks to borrow money and loan it out, while raising the rate has the opposite effect. Typically made at FOMC meetings, changes in the discount rate are widely reported and are viewed as a public signal of the Federal Reserve’s monetary policy. While the discount rate applies to a relatively small volume of borrowed reserves, it has broader implications. Other interest rates typically change in response to changes in the discount rate.

The Fed typically lowers rates when it wants to stimulate the economy and reduce the threat of recession. Lower interest rates increase demand for items like housing and automobiles, increasing production and helping to reduce the threat of recession. It also makes it less expensive for businesses and consumers to borrow money. The Fed has used this method frequently over the past couple of years, reducing the discount rate 11 times. The Fed typically increases rates when it wants to slow down the economy to prevent significant increases in inflation. Federal Reserve Bank.

Federal Reserve Bank