1Chapter 4The Federal Reserve System, Monetary Policy and Interest RatesThe Federal Reserve•Founded by Congress under the Federal Reserve Act in 1913in response to a series of U.S. financial panics which culminated in a particularly severe panic in 1907.•Subject to oversight by Congress under its authority to coin money•An independent central bank – its decisions do nothave to be ratified by the President.•The Fed was created to serve as a lender of last resort, as a bank regulator and as a monitor of the money supply. •Current objectives of the Fed include stimulating sustainable non-inflationary economic growth while keeping employment high.Functions of the Federal Reserve•Conduct monetary policy•Supervise and regulate depository institutions•Maintain financial system stability•Provide payment and other financial services to the U.S. government, the public, FIs, andforeign official institutions.•The Fed also assists in facilitating the nation’s payment systems. oThe Fed operates the Fed Wirewhich facilitates trading of bank reserves and an Automated Clearing House (ACH), which is a similar payments mechanism for debit and credit transactions..1•The Fed is largely independent of Congress and the President, at least in the short run. 1The Clearing House Interbank Payments System (CHIPS) provides yet another payment mechanism. CHIPS is a private sector electronic network operated by about 100 U.S. and foreign banks to facilitate correspondent services and international transactions.
2Structure of the Federal ReserveFRB = Federal Reserve Bank•Divided into 12 Federal Reserve districts, each with a main Federal Reserve Bank.•Each FRB has a nine member Board of Directors consisting as follows:oSix are elected by member banks in the district, of these six, three are non-bank business people.oThree are appointed by the Board of Governors of the Federal Reserve System.•Federal Reserve Banks operate under the general supervision of the Board of Governors of the Federal Reserve.•FRBs are nonprofit organizations, but they are owned by the member banks in their district. oPart of the independence of the Fed arises because the Fed generates positive net income from interest and fees so it is not directly dependent on Congressional funding. oThe Fed now pays interest on bank reserves and this reduces the profitability of the Fed. oThe Fed argues that paying interest minimizes reserve volatility.•FRS member banks “own” the 12 Federal Reserve BanksThe Federal Reserve Bank of New York (FRBNY)is generally considered the most important of the Federal Reserve Banks because so many of the largest U.S. and international banks are located in the New York district.