The Federal Reserve Purposes and Functions www.KansasCityFed.org

Creation of the Federal Reserve System… President Woodrow Wilson signed the Federal Reserve Act on December 23, 1913, establishing the Federal Reserve System. The creation of the Federal Reserve System was the nation’s third attempt to create a central bank.

Structure of the Federal Reserve System Board of Governors 7 members Appointed by President Confirmed by Senate Federal Open Market Committee Board of Governors Five Reserve Bank Presidents Advisory Councils Consumer Advisory Councils Federal Advisory Council Thrift Institutions Advisory Council Federal Reserve Banks Twelve district Banks Operate as arms of the Central Bank

Board of Governors Supervises and regulates the Reserve Banks Sets reserve requirements Approves changes in the discount rate Oversees the nation’s payments system Administers consumer credit protection laws Submits reports to Congress on state of economy

Regional Reserve Banks The 12 Federal Reserve Banks and their branches are responsible for: Operating a nationwide payments system Distributing the nation’s currency and coin Supervising member banks and holding companies Regulating member banks and holding companies Serving as a banker for the U.S. Treasury

Regional Banks

Independent within Government Government Qualities Created by and reports to congress Board of Governors are appointed by President and confirmed by Senate Earnings and assets ultimately returned to U.S. Treasury Independent Qualities Operates on own earnings rather than Congressional appropriations Board of Governors’ terms are long and staggered, limiting Presidential influence Unlike other central banks, it is separate from the Treasury

Board of Directors Nine member board Appoints all Bank officers Reviews Bank’s budget and expenditures Oversees Bank’s internal audit program Sets Bank’s discount rate every two weeks Brings regional or “grassroots” perspective to economic conditions facing the Tenth District

Federal Open Market Committee Structure of the FOMC 7 members of the Board of Governors (staggered 14-year terms) 4 of 11 Reserve Bank Presidents (annual rotation) New York Reserve Bank President Function of the FOMC Oversees open market operations – the primary tool of monetary policy Sets reserve requirements Sets ranges for the growth of money supply Directs operations by the Federal Reserve in foreign exchange markets

Advisory Committees Federal Advisory Council Consumer Thrift Institutions Twelve commercial bankers (one from each Reserve District) that meet with Board of Governors four times a year to discuss economic and banking matters Meets with Board of Governors to discuss matters concerning consumers and consumer credit protection laws Consists of representatives of savings and loans, savings banks, and credit unions. Meets with Board to relay needs and problems of thrift institutions

Member Banks All national banks and state member banks are members of the Federal Reserve System Member banks vote for 6 of the 9 directors at their regional Reserve Bank Member Requirements: Required to hold an amount equal to 6% of their capital and surplus in stock of regional Federal Reserve Bank; paid fixed 6% dividend

System Goals Stable prices Economic growth and stability High employment Balance in international accounts

System Functions Four functions to achieve primary goals: Monetary policy Banking supervision and regulation Financial services Government banking

Amounts that banks and other lenders can lend Monetary Policy Managing the money and credit conditions in the economy to promote goals and high employment, sustainable growth, and stable prices. Money Cash in circulation plus amounts that people and businesses are holding in bank accounts Credit Amounts that banks and other lenders can lend

Monetary Policy – Three Major Tools Open Market Desk Operations Discount Rate Reserve Requirements Buying and selling of U.S. government securities at the New York Fed’s open market desk. Primary securities dealers help carry out this responsibility Loose Policy – Buy Securities Tight Policy – Sell Securities Rate that the Fed charges banks who borrow money. Typically, most banks borrow on an overnight basis until other arrangements can be made with another lending institution. The rate that banks charge other banks is called the “fed funds rate”. Percentage of deposits that banks are required to either keep in the form of vault cash or in a reserve requirement account at the Federal Reserve Bank. (Tool least likely to be used.)

Bank Supervision & Regulation Bank examinations Shared responsibility for ensuring a safe and sound banking system Consumer and community protection laws Community Reinvestment Act Equal Credit Opportunity Act Fair Credit Reporting Act

Financial Services Process checks Process and distribute currency and coin produced by BEP and U.S. Mint Electronic payments FEDWIRE (transfer between banks) Automated Clearinghouse (ACH)

Bank for Government Maintains checking accounts for federal government Handles processing of U.S. Treasury securities Bills (mature < 1 year) Notes (mature 2-10 years) Bonds (mature > 30 years)

Want to Know More? Federal Reserve Bank of Kansas City http://www.kansascityfed.org Board of Governors of the Federal Reserve System http://www.federalreserve.gov U.S. Mint http://www.usmint.gov U.S. Bureau of Engraving and Printing http://www.moneyfactory.com