Federal Reserve System

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Federal Reserve System
Seal Federal Reserve System headquarters (Eccles Building)
Seal Federal Reserve System headquarters (Eccles Building)
Headquarters Washington, D.C.
Chairman Ben Bernanke
Central bank of United States
Currency U.S. dollar
ISO 4217 Code USD
Base borrowing rate 0%-0.25%[3]
Website federalreserve.gov
Banking in the United States

Monetary policy
The Federal Reserve System

Regulation

Lending
Credit card

Deposit accounts
Savings account
Checking account
Money market account
Certificate of deposit

Deposit account insurance
FDIC and NCUA

Electronic funds transfer (EFT)
ATM card
Debit card
ACH
Bill payment
EBT
Wire transfer

Check Clearing System
Checks
Substitute checksCheck 21 Act

Types of bank charter
Credit union
Federal savings bank
Federal savings association
National bank

 v  d  e 

The Federal Reserve System (also known as the Federal Reserve, and informally as The Fed) is the central banking system of the United States. It was created in 1913 with the enactment of the Federal Reserve Act, and was largely a response to a series of financial panics, particularly a severe panic in 1907.[1][2][3] Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved.[2][4] Events such as the Great Depression were major factors leading to changes in the system.[5] Its duties today, according to official Federal Reserve documentation, are to conduct the nation's monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institutions, the U.S. government, and foreign official institutions.[6]

The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous other private U.S. member banks and various advisory councils.[7][8][9] The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time. The division of responsibilities of the central bank falls into several separate and independent parts, some private and some public. The result is a structure that is considered unique among central banks. It is also unusual in that an entity (the United States Department of the Treasury) outside of the central bank creates the currency used.[10]

According to the Board of Governors, the Federal Reserve is independent within government in the sense that "its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government." However, its authority is derived from the U.S. Congress and is subject to congressional oversight. Additionally, the members of the Board of Governors, including its chairman and vice-chairman, are chosen by the President and confirmed by Congress. The government also exercises some control over the Federal Reserve by appointing and setting the salaries of the system's highest-level employees. Thus the Federal Reserve has both private and public aspects.[11] The U.S. Government receives all of the system's annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an account surplus is maintained. The Federal Reserve transferred a record amount of $45 billion to the U.S. Treasury in 2009.[12]

Contents

[edit] History

[edit] Central banking in the United States

The first paper money issued in the United States was by the Massachusetts Bay Colony in 1690. Soon other colonies began printing their own money as well. The demand for currency in the colonies was due to the scarcity of coins, which had been the primary means of trade at the time.[13] A colony's currency was used to pay for its expenses, as well as a means to loan money to the colony's citizens. The bills quickly became the primary means of exchange within the colonies, and were even used in financial transactions with other colonies.[14] However, some currencies were not redeemable in gold and silver, which caused their value to depreciate quickly.[13]

The first attempt at a national currency was during the Revolutionary war. In 1775 the Continental Congress issued paper currency, and called their bills "Continentals". But the money was not backed by gold or silver and its value depreciated quickly.[13]

In 1791, which was after the U.S. Constitution was ratified, the government granted the First Bank of the United States a charter to operate as the U.S.'s central bank until 1811.[13] Unlike the prior attempt at a centralized currency, the increase in the federal government's power—granted to it by the constitution—allowed national central banks to possess a monopoly on the minting of U.S currency.[15] Nonetheless, The First Bank of the United States came to an end when President Madison refused to renew its charter. The Second Bank of the United States met a similar fate under President Jackson. Both banks were based upon the Bank of England.[16] Ultimately, a third national bank—known as the Federal Reserve—was established in 1913 and still exists to this day. The time line of central banking in the United States is as follows:[17][18][19]

First Bank of the United States
No central bank
Second Bank of the United States
Free Bank Era
Independent Treasury System
National Banks
Federal Reserve System

[edit] Creation of First and Second Central Bank

The first U.S. institution with central banking responsibilities was the First Bank of the United States, chartered by Congress and signed into law by President George Washington on February 25, 1791 at the urging of Alexander Hamilton. This was done despite strong opposition from Thomas Jefferson and James Madison, among numerous others. The charter was for twenty years and expired in 1811 under President James Madison, because Congress refused to renew it.[20]

In 1816, however, Madison revived it in the form of the Second Bank of the United States. Early renewal of the bank's charter became the primary issue in the reelection of President Andrew Jackson. After Jackson, who was opposed to the central bank, was reelected, he pulled the government's funds out of the bank. Nicholas Biddle, President of the Second Bank of the United States, responded by contracting the money supply to pressure Jackson to renew the bank's charter forcing the country into a recession, which the bank blamed on Jackson's policies. Interestingly, Jackson is the only President to completely pay off the national debt. The bank's charter was not renewed in 1836. From 1837 to 1862, in the Free Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank panics, in 1873, 1893, and 1907, provided strong demand for the creation of a centralized banking system.

[edit] Creation of Third Central Bank

The main motivation for the third central banking system came from the Panic of 1907, which caused renewed demands for banking and currency reform.[21] During the last quarter of the 19th century and the beginning of the 20th century the United States economy went through a series of financial panics.[22] According to many economists, the previous national banking system had two main weaknesses: an inelastic currency and a lack of liquidity.[22] In 1908, Congress enacted the Aldrich-Vreeland Act, which provided for an emergency currency and established the National Monetary Commission to study banking and currency reform.[23] The National Monetary Commission returned with recommendations which later became the basis of the Federal Reserve Act, passed in 1913.

[edit] Federal Reserve Act
Newspaper clipping, December 24, 1913

The head of the bipartisan National Monetary Commission was financial expert and Senate Republican leader Nelson Aldrich. Aldrich set up two commissions—one to study the American monetary system in depth and the other, headed by Aldrich himself, to study the European central banking systems and report on them.[23] Aldrich went to Europe opposed to centralized banking, but after viewing Germany's monetary system he came away believing that a centralized bank was better than the government-issued bond system that he had previously supported.

In early November 1910, Aldrich met with five well known members of the New York banking community to devise a central banking bill. Paul Warburg, an attendee of the meeting and long time advocate of central banking in the U.S., later wrote that Aldrich was "bewildered at all that he had absorbed abroad and he was faced with the difficult task of writing a highly technical bill while being harassed by the daily grind of his parliamentary duties."[24] After ten days of deliberation, the bill, which would later be referred to as the "Aldrich Plan", was agreed upon. It had several key components including: a central bank with a Washington based headquarters and fifteen branches located throughout the U.S. in geographically strategic locations, and a uniform elastic currency based on gold and commercial paper. Aldrich believed a central banking system with no political involvement was best, but was convinced by Warburg that a plan with no public control was not politically feasible.[24] The compromise involved representation of the public sector on the Board of Directors.[25]

Aldrich's bill was met with much opposition from politicians. Critics were suspicious of a central bank, and charged Aldrich of being biased due to his close ties to wealthy bankers such as J. P. Morgan and John D. Rockefeller, Jr., Aldrich's son-in-law. Most Republicans favored the Aldrich Plan,[25] but it lacked enough support in Congress to pass because rural and western states viewed it as favoring the "eastern establishment".[1] In contrast, progressive Democrats favored a reserve system owned and operated by the government; they believed that public ownership of the central bank would end Wall Street's control of the American currency supply.[25] Conservative Democrats fought for a privately owned, yet decentralized, reserve system, which would still be free of Wall Street's control.[25]

The original Aldrich Plan was dealt a fatal blow in 1912, when Democrats won the White House and Congress.[24] Nonetheless, President Woodrow Wilson believed that the Aldrich plan would suffice with a few modifications. The plan became the basis for the Federal Reserve Act, which was proposed by Senator Robert Owen in May 1913. The primary difference between the two bills was the transfer of control of the Board of Directors (called the Federal Open Market Committee in the Federal Reserve Act) to the government.[1][20] The bill passed Congress in late 1913[26][27] on a mostly partisan basis, with most Democrats voting "yea" and most Republicans voting "nay".[20]

[edit] Key laws

Key laws affecting the Federal Reserve have been:[28]

[edit] Purpose

The primary motivation for creating the Federal Reserve System was to address banking panics.[2] Other purposes are stated in the Federal Reserve Act, such as "to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes".[29] Before the founding of the Federal Reserve, the United States underwent several financial crises. A particularly severe crisis in 1907 led Congress to enact the Federal Reserve Act in 1913. Today the Fed has broader responsibilities than only ensuring the stability of the financial system.[30]

Current functions of the Federal Reserve System include:[6][30]

[edit] Addressing the problem of bank panics

Bank runs occur because banking institutions in the United States are only required to hold a fraction of their depositors' money in reserve. This practice is called fractional-reserve banking. As a result, most banks invest the majority of their depositors' money. On rare occasion, too many of the bank's customers will withdraw their savings and the bank will need help from another institution to continue operating. Bank runs can lead to a multitude of social and economic problems. The Federal Reserve was designed as an attempt to prevent or minimize the occurrence of bank runs, and possibly act as a lender of last resort if a bank run does occur. Many economists, following Milton Friedman, believe that the Federal Reserve inappropriately refused to lend money to small banks during the bank runs of 1929.[32]

[edit] Elastic currency

The monthly changes in the currency component of the U.S. money supply show currency being added into (% change greater than zero) and removed from circulation (% change less than zero). The most noticeable changes occur around the Christmas holiday shopping season as new currency is created so people can make withdrawals at banks, and then removed from circulation afterwards, when less cash is demanded.

One way to prevent bank runs is to have a money supply that can expand when money is needed. The term "elastic currency" in the Federal Reserve Act does not just mean the ability to expand the money supply, but also to contract it. Some economic theories have been developed that support the idea of expanding or shrinking a money supply as economic conditions warrant. Elastic currency is defined by the Federal Reserve as:[33]

Currency that can, by the actions of the central monetary authority, expand or contract in amount warranted by economic conditions.

Monetary policy of the Federal Reserve System is based partially on the theory that it is best overall to expand or contract the money supply as economic conditions change.

[edit] Check Clearing System

Because some banks refused to clear checks from certain others during times of economic uncertainty, a check-clearing system was created in the Federal Reserve system. It is briefly described in The Federal Reserve System—Purposes and Functions as follows:[34]

By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1907. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system. The System, then, was to provide not only an elastic currency—that is, a currency that would expand or shrink in amount as economic conditions warranted—but also an efficient and equitable check-collection system.

[edit] Lender of last resort

[edit] Emergencies

According to the Federal Reserve Bank of Minneapolis, "the Federal Reserve has the authority and financial resources to act as 'lender of last resort' by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy."[35] The Federal Reserve System's role as lender of last resort has been criticized because it shifts the risk and responsibility away from lenders and borrowers and places it on others in the form of inflation.[36]

[edit] Fluctuations

Through its discount and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. Longer term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is the discount rate (officially the primary credit rate).

By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates.[37] For example, on September 16, 2008, the Federal Reserve Board authorized an $85 billion loan to stave off the bankruptcy of international insurance giant American International Group (AIG).[38][39]

[edit] Central bank

In its role as the central bank of the United States, the Fed serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system. As the government's bank, or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars. Just as an individual might keep an account at a bank, the U.S. Treasury keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled. As part of this service relationship, the Fed sells and redeems U.S. government securities such as savings bonds and Treasury bills, notes and bonds. It also issues the nation's coin and paper currency. The U.S. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually produces the nation's cash supply and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways.[40] During the Fiscal Year 2008, the Bureau of Engraving and Printing delivered 7.7 billion notes at an average cost of 6.4 cents per note.[41]

[edit] Federal funds

Federal funds are the reserve balances (also called federal reserve accounts) that private banks keep at their local Federal Reserve Bank.[42][43] These balances are the namesake reserves of the Federal Reserve System. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism for private banks to lend funds to one another. This market for funds plays an important role in the Federal Reserve System as it is what inspired the name of the system and it is what is used as the basis for monetary policy. Monetary policy works by influencing how much money the private banks charge each other for the lending of these funds.

Federal reserve accounts contain federal reserve credit, which can be converted into federal reserve notes. Private banks maintain their bank reserves in federal reserve accounts.

[edit] Balance between private banks and responsibility of governments

The system was designed out of a compromise between the competing philosophies of privatization and government regulation. In 2006 Donald L. Kohn, vice chairman of the Board of Governors, summarized the history of this compromise:[44]

Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under public, rather than banker, control. But the vast majority of the nation's bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees.

The legislation that Congress ultimately adopted in 1913 reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today.

In the current system, private banks are for-profit businesses but government regulation places restrictions on what they can do. The Federal Reserve System is a part of government that regulates the private banks. The balance between privatization and government involvement is also seen in the structure of the system. Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the Board of Governors are selected by the President of the United States and confirmed by the Senate. The private banks give input to the government officials about their economic situation and these government officials use this input in Federal Reserve policy decisions. In the end, private banking businesses are able to run a profitable business while the U.S. government, through the Federal Reserve System, oversees and regulates the activities of the private banks.

[edit] Government regulation and supervision

Ben Bernanke (lower-right), Chairman of the Federal Reserve Board of Governors, at a House Financial Services Committee hearing on February 10, 2009. Members of the Board frequently testify before congressional committees such as this one. The Senate equivalent of the House Financial Services Committee is the Senate Committee on Banking, Housing, and Urban Affairs.

Federal Banking Agency Audit Act enacted in 1978 as Public Law 95-320 and Section 31 USC 714 of U.S. Code establish that the Federal Reserve may be audited by the Government Accountability Office (GAO).[45] The GAO has authority to audit check-processing, currency storage and shipments, and some regulatory and bank examination functions, however there are restrictions to what the GAO may in fact audit. Audits of the Reserve Board and Federal Reserve banks may not include:

  1. transactions for or with a foreign central bank or government, or nonprivate international financing organization;
  2. deliberations, decisions, or actions on monetary policy matters;
  3. transactions made under the direction of the Federal Open Market Committee; or
  4. a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items (1), (2), or (3).[46][47]

The financial crisis which began in 2007, corporate bailouts, and concerns over the Fed's secrecy have brought renewed concern regarding ability of the Fed to effectively manage the national monetary system.[48] A July 2009 Gallup Poll found only 30% Americans thought the Fed was doing a good or excellent job, a rating even lower than that for the Internal Revenue Service, which drew praise from 40%.[49] The Federal Reserve Transparency Act was introduced by congressman Ron Paul in order to obtain a more detailed audit of the Fed. The Fed has since hired Linda Robertson who headed the Washington lobbying office of Enron Corp. and was adviser to all three of the Clinton administration's Treasury secretaries.[50][51][52][53]

The Board of Governors in the Federal Reserve System has a number of supervisory and regulatory responsibilities in the U.S. banking system, but not complete responsibility. A general description of the types of regulation and supervision involved in the U.S. banking system is given by the Federal Reserve:[54]

The Board also plays a major role in the supervision and regulation of the U.S. banking system. It has supervisory responsibilities for state-chartered banks that are members of the Federal Reserve System, bank holding companies (companies that control banks), the foreign activities of member banks, the U.S. activities of foreign banks, and Edge Act and agreement corporations (limited-purpose institutions that engage in a foreign banking business). The Board and, under delegated authority, the Federal Reserve Banks, supervise approximately 900 state member banks and 5,000 bank holding companies. Other federal agencies also serve as the primary federal supervisors of commercial banks; the Office of the Comptroller of the Currency supervises national banks, and the Federal Deposit Insurance Corporation supervises state banks that are not members of the Federal Reserve System.

Some regulations issued by the Board apply to the entire banking industry, whereas others apply only to member banks, that is, state banks that have chosen to join the Federal Reserve System and national banks, which by law must be members of the System. The Board also issues regulations to carry out major federal laws governing consumer credit protection, such as the Truth in Lending, Equal Credit Opportunity, and Home Mortgage Disclosure Acts. Many of these consumer protection regulations apply to various lenders outside the banking industry as well as to banks.

Members of the Board of Governors are in continual contact with other policy makers in government. They frequently testify before congressional committees on the economy, monetary policy, banking supervision and regulation, consumer credit protection, financial markets, and other matters.

The Board has regular contact with members of the President's Council of Economic Advisers and other key economic officials. The Chairman also meets from time to time with the President of the United States and has regular meetings with the Secretary of the Treasury. The Chairman has formal responsibilities in the international arena as well.

[edit] Preventing asset bubbles

The board of directors of each Federal Reserve Bank District also has regulatory and supervisory responsibilities. For example, a member bank (private bank) is not permitted to give out too many loans to people who cannot pay them back. This is because too many defaults on loans will lead to a bank run. If the board of directors has judged that a member bank is performing or behaving poorly, it will report this to the Board of Governors. This policy is described in United States Code:[55]

Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.

The punishment for making false statements or reports that overvalue an asset is also stated in the U.S. Code:[56]

Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way...shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

These aspects of the Federal Reserve System are the parts intended to prevent or minimize speculative asset bubbles, which ultimately lead to severe market corrections. The recent bubbles and corrections in energies, grains, equity and debt products and real estate cast doubt on the efficacy of these controls.

[edit] National payments system

[57] The Federal Reserve plays an important role in the U.S. payments system. The twelve Federal Reserve Banks provide banking services to depository institutions and to the federal government. For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin. For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming U.S. government securities.

In passing the Depository Institutions Deregulation and Monetary Control Act of 1980, Congress reaffirmed its intention that the Federal Reserve should promote an efficient nationwide payments system. The act subjects all depository institutions, not just member commercial banks, to reserve requirements and grants them equal access to Reserve Bank payment services. It also encourages competition between the Reserve Banks and private-sector providers of payment services by requiring the Reserve Banks to charge fees for certain payments services listed in the act and to recover the costs of providing these services over the long run.

The Federal Reserve plays a vital role in both the nation's retail and wholesale payments systems, providing a variety of financial services to depository institutions. Retail payments are generally for relatively small-dollar amounts and often involve a depository institution's retail clients—individuals and smaller businesses. The Reserve Banks' retail services include distributing currency and coin, collecting checks, and electronically transferring funds through the automated clearinghouse system. By contrast, wholesale payments are generally for large-dollar amounts and often involve a depository institution's large corporate customers or counterparties, including other financial institutions. The Reserve Banks' wholesale services include electronically transferring funds through the Fedwire Funds Service and transferring securities issued by the U.S. government, its agencies, and certain other entities through the Fedwire Securities Service. Because of the large amounts of funds that move through the Reserve Banks every day, the System has policies and procedures to limit the risk to the Reserve Banks from a depository institution's failure to make or settle its payments.

The Federal Reserve Banks began a multi-year restructuring of their check operations in 2003 as part of a long-term strategy to respond to the declining use of checks by consumers and businesses and the greater use of electronics in check processing. The Reserve Banks will have reduced the number of full-service check processing locations from 45 in 2003 to 4 by early 2011.[58]

[edit] Structure

Organization of the Federal Reserve System

The Federal Reserve System has both private and public components, and can make decisions without the permission of Congress or the President of the U.S.[59] The System does not require public funding, and derives its authority and purpose from the Federal Reserve Act passed by Congress in 1913. The two main aspects of the Federal Reserve System are the Federal Open Market Committee and regional Federal Reserve Banks located throughout the country.

[edit] Board of Governors

The seven-member Board of Governors is a federal agency and is the main governing body of the Federal Reserve System. It is charged with overseeing the 12 District Reserve Banks and setting national monetary policy. It also supervises and regulates the U.S. banking system in general.[60] Governors are appointed by the President of the United States and confirmed by the Senate for staggered 14-year terms.[37] The Board is required to make an annual report of operations to the Speaker of the U.S. House of Representatives.

The Chairman and Vice Chairman of the Board of Governors are appointed by the President from among the sitting Governors. They both serve a four year term and they can be renominated as many times as the President chooses, until their terms on the Board of Governors expire, but—regardless of whether either is reconfirmed for their chairmanship or vice chairmanship—he or she is free to complete their term on the Board of Governors.[61]

[edit] List of members of the Board of Governors

The current members of the Board of Governors are as follows:[62]

Commissioner Entered office[63] Term expires
Ben Bernanke
(Chairman)
February 1, 2006 January 31, 2020
January 31, 2014 (as Chairman)
Janet Yellen
(Vice Chairman)
October 4, 2010 January 31, 2024
October 4, 2014 (as Vice Chairman)
Kevin Warsh February 24, 2006 January 31, 2018
Elizabeth Duke August 5, 2008 January 31, 2012
Daniel Tarullo January 28, 2009 January 31, 2022
Sarah Bloom Raskin October 4, 2010 January 31, 2016
Vacant ——

[edit] Federal Open Market Committee

The Federal Open Market Committee (FOMC) consists of 12 members, seven from the Board of Governors and five representatives from the regional Federal Reserve Banks. The FOMC oversees open market operations, the principal tool of national monetary policy. These operations affect the amount of Federal Reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions. The FOMC also directs operations undertaken by the Federal Reserve in foreign exchange markets. The representative from the Federal Reserve Bank of New York, is a permanent member, while the rest of the banks rotate at two- and three-year intervals. All Regional Reserve Bank presidents contribute to the committee's assessment of the economy and of policy options, but only the five presidents vote on policy decisions. The FOMC determines its own internal organization and, by tradition, elects the Chairman of the Board of Governors as its chairman and the president of the Federal Reserve Bank of New York as its vice chairman. It is informal policy, within the FOMC, for the Board of Governors and the New York Federal Reserve Bank president to vote with the Chairman of the FOMC. Additionally, anyone who is not an expert on monetary policy traditionally votes with the chairman as well. In any vote, no more than two FOMC members can dissent.[64] Formal meetings typically are held eight times each year in Washington, D.C. Nonvoting Reserve Bank presidents also participate in Committee deliberations and discussion. The FOMC generally meets eight times a year in telephone consultations and other meetings are held when needed.[65]

[edit] Federal Reserve Banks

Federal Reserve Districts

There are 12 Federal Reserve Banks, and they are located in the following cities: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Each reserve Bank is responsible for member banks located in its district. The size of each district was set based upon the population distribution of the United States when the Federal Reserve Act was passed. Each regional Bank has a president, who is the chief executive officer of their Bank. Each regional Reserve Bank's president is nominated by their Bank's board of directors, but the nomination is contingent upon approval by the Board of Governors. Presidents serve five year terms and may be reappointed.[66]

Each regional Bank's board consists of nine members. Members are broken down into three classes: A, B, and C. There are three board members in each class. Class A members are chosen by the regional Bank's shareholders, and are intended to represent member banks' interests. Member banks are divided into large, medium, and small. Each size bank elects one of the three class A board members. Class B board members are also nominated by the region's member banks, but class B board members are supposed to represent the interests of the public. Lastly, class C board members are nominated by the Board of Governors, and are also intended to represent the interests of the public.[67]

A member bank is a private institution and owns stock in its regional Federal Reserve Bank. All nationally chartered banks hold stock in one of the Federal Reserve Banks. State chartered banks may choose to be members (and hold stock in their regional Federal Reserve bank), upon meeting certain standards. About 38% of U.S. banks are members of part of the system.[68] The amount of stock a member bank must own is equal to 3% of its combined capital and surplus.[69] Holding stock in a Federal Reserve bank is not, however, like owning the stock of a publicly traded company, because it cannot be sold or traded.[70] From the profits of the Regional Banks, each member bank receives a dividend equal to 6% of the stock it owns in the regional Reserve Bank to which it is a member.[59] The remainder of the regional Federal Reserve Banks' profits is given to the United States Treasury Department. In 2009, the Federal Reserve Banks distributed $1.4 billion in dividends to member banks and returned $47 billion to the U.S. Treasury.[71]

[edit] Legal status of regional Federal Reserve Banks

The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally-created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.[72] Each member bank (commercial banks in the Federal Reserve district) owns a nonnegotiable share of stock in its regional Federal Reserve Bank. However, holding Federal Reserve Bank stock is unlike owning stock in a publicly traded company. The charter of each Federal Reserve Bank is established by law and cannot be altered by the member banks. Federal Reserve Bank stock cannot be sold or traded, and member banks do not control the Federal Reserve Bank as a result of owning this stock. They do, however, elect six of the nine members of the Federal Reserve Banks' boards of directors.[37] In Lewis v. United States,[73] the United States Court of Appeals for the Ninth Circuit stated that: "The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations." The opinion went on to say, however, that: "The Reserve Banks have properly been held to be federal instrumentalities for some purposes." Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,[72] in which the distinction is made between Federal Reserve Banks, which are federally-created instrumentalities, and the Board of Governors, which is a federal agency.

[edit] Monetary policy

The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. What happens to money and credit affects interest rates (the cost of credit) and the performance of the U.S. economy. The Federal Reserve Act of 1913 gave the Federal Reserve authority to set monetary policy.[74][75]

[edit] Interbank lending is the basis of policy

The Federal Reserve sets monetary policy by influencing the Federal funds rate, which is the rate of interbank lending of excess reserves. The rate that banks charge each other for these loans is determined by the markets but the Federal Reserve influences this rate through the three "tools" of monetary policy described in the Tools section below.

The Federal Funds rate is a short-term interest rate the FOMC focuses on directly. This rate ultimately affects the longer-term interest rates throughout the economy. A summary of the basis and implementation of monetary policy is stated by the Federal Reserve:

The Federal Reserve implements U.S. monetary policy by affecting conditions in the market for balances that depository institutions hold at the Federal Reserve Banks...By conducting open market operations, imposing reserve requirements, permitting depository institutions to hold contractual clearing balances, and extending credit through its discount window facility, the Federal Reserve exercises considerable control over the demand for and supply of Federal Reserve balances and the federal funds rate. Through its control of the federal funds rate, the Federal Reserve is able to foster financial and monetary conditions consistent with its monetary policy objectives.
[76]

This influences the economy through its effect on the quantity of reserves that banks use to make loans. Policy actions that add reserves to the banking system encourage lending at lower interest rates thus stimulating growth in money, credit, and the economy. Policy actions that absorb reserves work in the opposite direction. The Fed's task is to supply enough reserves to support an adequate amount of money and credit, avoiding the excesses that result in inflation and the shortages that stifle economic growth.[77]

[edit] Tools

There are three main tools of monetary policy that the Federal Reserve uses to influence the amount of reserves in private banks:[74]

Tool Description
open market operations purchases and sales of U.S. Treasury and federal agency securities—the Federal Reserve's principal tool for implementing monetary policy. The Federal Reserve's objective for open market operations has varied over the years. During the 1980s, the focus gradually shifted toward attaining a specified level of the federal funds rate (the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed), a process that was largely complete by the end of the decade.[78]
discount rate the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility—the discount window.[79]
reserve requirements the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.[80]

[edit] Federal funds rate and open market operations

The effective federal funds rate charted over more than fifty years.

The Federal Reserve System implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed. The Fed therefore tries to align the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations. The Federal Reserve System usually adjusts the federal funds rate by 0.25% or 0.50% at a time.

Open market operations allow the Federal Reserve to increase or decrease the amount of money in the banking system as necessary to balance the Federal Reserve's dual mandates. Open market operations are done through the sale and purchase of United States Treasury security, sometimes called "Treasury bills" or more informally "T-bills". The Federal Reserve buys Treasury bills from its primary dealers. The purchase of these securities affects the federal funds rate, because primary dealers have accounts at depository institutions.[81]

The Federal Reserve education website describes open market operations as follows:[75]

Open market operations involve the buying and selling of U.S. government securities (federal agency and mortgage-backed). The term 'open market' means that the Fed doesn't decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an 'open market' in which the various securities dealers that the Fed does business with—the primary dealers—compete on the basis of price. Open market operations are flexible and thus, the most frequently used tool of monetary policy.

Open market operations are the primary tool used to regulate the supply of bank reserves. This tool consists of Federal Reserve purchases and sales of financial instruments, usually securities issued by the U.S. Treasury, Federal agencies and government-sponsored enterprises. Open market operations are carried out by the Domestic Trading Desk of the Federal Reserve Bank of New York under direction from the FOMC. The transactions are undertaken with primary dealers.

The Fed's goal in trading the securities is to affect the federal funds rate, the rate at which banks borrow reserves from each other. When the Fed wants to increase reserves, it buys securities and pays for them by making a deposit to the account maintained at the Fed by the primary dealer's bank. When the Fed wants to reduce reserves, it sells securities and collects from those accounts. Most days, the Fed does not want to increase or decrease reserves permanently so it usually engages in transactions reversed within a day or two. That means that a reserve injection today could be withdrawn tomorrow morning, only to be renewed at some level several hours later. These short-term transactions are called repurchase agreements (repos) – the dealer sells the Fed a security and agrees to buy it back at a later date.

[edit] Repurchase agreements

To smooth temporary or cyclical changes in the money supply, the desk engages in repurchase agreements (repos) with its primary dealers. Repos are essentially secured, short-term lending by the Fed. On the day of the transaction, the Fed deposits money in a primary dealer's reserve account, and receives the promised securities as collateral. When the transaction matures, the process unwinds: the Fed returns the collateral and charges the primary dealer's reserve account for the principal and accrued interest. The term of the repo (the time between settlement and maturity) can vary from 1 day (called an overnight repo) to 65 days.[82]

[edit] Discount rate

The Federal Reserve System also directly sets the "discount rate", which is the interest rate for "discount window lending", overnight loans that member banks borrow directly from the Fed. This rate is generally set at a rate close to 100 basis points above the target federal funds rate. The idea is to encourage banks to seek alternative funding before using the "discount rate" option.[83] The equivalent operation by the European Central Bank is referred to as the "marginal lending facility".[84]

Both the discount rate and the federal funds rate influence the prime rate, which is usually about 3 percent higher than the federal funds rate.

[edit] Reserve requirements

Another instrument of monetary policy adjustment employed by the Federal Reserve System is the fractional reserve requirement, also known as the required reserve ratio.[85] The required reserve ratio sets the balance that the Federal Reserve System requires a depository institution to hold in the Federal Reserve Banks,[76] which depository institutions trade in the federal funds market discussed above.[86] The required reserve ratio is set by the Board of Governors of the Federal Reserve System.[87] The reserve requirements have changed over time and some of the history of these changes is published by the Federal Reserve.[88]

Reserve Requirements in the U.S. Federal Reserve System[80]
Type of liability Requirement
Percentage of liabilities Effective date
Net transaction accounts
$0 to $10.3 million 0 01/01/09
More than $10.3 million to $44.4 million 3 01/01/09
More than $44.4 million 10 01/01/09

Nonpersonal time deposits 0 12/27/90

Eurocurrency liabilities 0 12/27/90

As a response to the financial crisis of 2008, the Federal Reserve now makes interest payments on depository institutions' required and excess reserve balances. The payment of interest on excess reserves gives the central bank greater opportunity to address credit market conditions while maintaining the federal funds rate close to the target rate set by the FOMC.[89]

[edit] New facilities

In order to address problems related to the subprime mortgage crisis and United States housing bubble, several new tools have been created. The first new tool, called the Term Auction Facility, was added on December 12, 2007. It was first announced as a temporary tool[90] but there have been suggestions that this new tool may remain in place for a prolonged period of time.[91] Creation of the second new tool, called the Term Securities Lending Facility, was announced on March 11, 2008.[92] The main difference between these two facilities is that the Term Auction Facility is used to inject cash into the banking system whereas the Term Securities Lending Facility is used to inject treasury securities into the banking system.[93] Creation of the third tool, called the Primary Dealer Credit Facility (PDCF), was announced on March 16, 2008.[94] The PDCF was a fundamental change in Federal Reserve policy because now the Fed is able to lend directly to primary dealers, which was previously against Fed policy.[95] The differences between these 3 new facilities is described by the Federal Reserve:[96]

The Term Auction Facility program offers term funding to depository institutions via a bi-weekly auction, for fixed amounts of credit. The Term Securities Lending Facility will be an auction for a fixed amount of lending of Treasury general collateral in exchange for OMO-eligible and AAA/Aaa rated private-label residential mortgage-backed securities. The Primary Dealer Credit Facility now allows eligible primary dealers to borrow at the existing Discount Rate for up to 120 days.

Some of the measures taken by the Federal Reserve to address this mortgage crisis haven't been used since The Great Depression.[97] The Federal Reserve gives a brief summary of what these new facilities are all about:[98]

As the economy has slowed in the last nine months and credit markets have become unstable, the Federal Reserve has taken a number of steps to help address the situation. These steps have included the use of traditional monetary policy tools at the macroeconomic level as well as measures at the level of specific markets to provide additional liquidity.

The Federal Reserve's response has continued to evolve since pressure on credit markets began to surface last summer, but all these measures derive from the Fed's traditional open market operations and discount window tools by extending the term of transactions, the type of collateral, or eligible borrowers.

A fourth facility, the Term Deposit Facility, was announced December 9, 2009, and approved April 30, 2010, with an effective date of Jun 4, 2010.[99] The Term Deposit Facility allows Reserve Banks to offer term deposits to institutions that are eligible to receive earnings on their balances at Reserve Banks. Term deposits are intended to facilitate the implementation of monetary policy by providing a tool by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions. Funds placed in term deposits are removed from the accounts of participating institutions for the life of the term deposit and thus drain reserve balances from the banking system.

[edit] Term auction facility

The Term Auction Facility is a program in which the Federal Reserve auctions term funds to depository institutions.[90] The creation of this facility was announced by the Federal Reserve on December 12, 2007 and was done in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank to address elevated pressures in short-term funding markets.[100] The reason it was created is because banks were not lending funds to one another and banks in need of funds were refusing to go to the discount window. Banks were not lending money to each other because there was a fear that the loans would not be paid back. Banks refused to go to the discount window because it is usually associated with the stigma of bank failure.[101][102][103][104] Under the Term Auction Facility, the identity of the banks in need of funds is protected in order to avoid the stigma of bank failure.[105] Foreign exchange swap lines with the European Central Bank and Swiss National Bank were opened so the banks in Europe could have access to U.S. dollars.[105] Federal Reserve Chairman Ben Bernanke briefly described this facility to the U.S. House of Representatives on January 17, 2008:

the Federal Reserve recently unveiled a term auction facility, or TAF, through which prespecified amounts of discount window credit can be auctioned to eligible borrowers. The goal of the TAF is to reduce the incentive for banks to hoard cash and increase their willingness to provide credit to households and firms...TAF auctions will continue as long as necessary to address elevated pressures in short-term funding markets, and we will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives.[106]

It is also described in the Term Auction Facility FAQ[90]

The TAF is a credit facility that allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help ensure that liquidity provisions can be disseminated efficiently even when the unsecured interbank markets are under stress.

In short, the TAF will auction term funds of approximately one-month maturity. All depository institutions that are judged to be in sound financial condition by their local Reserve Bank and that are eligible to borrow at the discount window are also eligible to participate in TAF auctions. All TAF credit must be fully collateralized. Depositories may pledge the broad range of collateral that is accepted for other Federal Reserve lending programs to secure TAF credit. The same collateral values and margins applicable for other Federal Reserve lending programs will also apply for the TAF.

[edit] Term securities lending facility

The Term Securities Lending Facility is a 28-day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York's primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.[107] Like the Term Auction Facility, the TSLF was done in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank. The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable. It is anticipated by Federal Reserve officials that the primary dealers, which include Goldman Sachs Group. Inc., J.P. Morgan Chase, and Morgan Stanley, will lend the Treasuries on to other firms in return for cash. That will help the dealers finance their balance sheets.[citation needed] The currency swap lines with the European Central Bank and Swiss National Bank were increased.

[edit] Primary dealer credit facility

The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that will provide funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally.[96] This new facility marks a fundamental change in Federal Reserve policy because now primary dealers can borrow directly from the Fed when this previously was not permitted.

[edit] Interest on reserves

As of October 2008, the Federal Reserve banks will pay interest on reserve balances (required & excess) held by depository institutions. The rate is set at the lowest federal funds rate during the reserve maintenance period of an institution, less 75bp.[108] As of October 23, 2008, the Fed has lowered the spread to a mere 35 bp.[109]

[edit] Term deposit facility

The Term Deposit Facility is a program through which the Federal Reserve Banks will offer interest-bearing term deposits to eligible institutions. By removing "excess deposits" from participating banks, the overall level of reserves available for lending is reduced, which should result in increased market interest rates, acting as a brake on economic activity and inflation. The Federal Reserve has stated that:

Term deposits will be one of several tools that the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy. The development of the TDF is a matter of prudent planning and has no implication for the near-term conduct of monetary policy.[110]

The Federal Reserve initially authorized up to five "small-value offerings are designed to ensure the effectiveness of TDF operations and to provide eligible institutions with an opportunity to gain familiarity with term deposit procedures."[111] After three of the offering auctions were successfully completed, it was announced that small-value auctions would continue on an on-going basis.[112]

The Term Deposit Facility is essentially a tool available to reverse the efforts that have been employed to provide liquidity to the financial markets and to reduce the amount of capital available to the economy. As stated in Bloomberg News:

Policy makers led by Chairman Ben S. Bernanke are preparing for the day when they will have to start siphoning off more than $1 trillion in excess reserves from the banking system to contain inflation. The Fed is charting an eventual return to normal monetary policy, even as a weakening near-term outlook has raised the possibility it may expand its balance sheet.[113]

Chairman Ben S. Bernanke, testifying before House Committee on Financial Services, described the Term Deposit Facility and other facilities to Congress in the following terms:

Most importantly, in October 2008 the Congress gave the Federal Reserve statutory authority to pay interest on balances that banks hold at the Federal Reserve Banks. By increasing the interest rate on banks' reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates, as banks will not supply short-term funds to the money markets at rates significantly below what they can earn by holding reserves at the Federal Reserve Banks. Actual and prospective increases in short-term interest rates will be reflected in turn in higher longer-term interest rates and in tighter financial conditions more generally. ...

As an additional means of draining reserves, the Federal Reserve is also developing plans to offer to depository institutions term deposits, which are roughly analogous to certificates of deposit that the institutions offer to their customers. A proposal describing a term deposit facility was recently published in the Federal Register, and the Federal Reserve is finalizing a revised proposal in light of the public comments that have been received. After a revised proposal is reviewed by the Board, we expect to be able to conduct test transactions this spring and to have the facility available if necessary thereafter. The use of reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so.

When these tools are used to drain reserves from the banking system, they do so by replacing bank reserves with other liabilities; the asset side and the overall size of the Federal Reserve's balance sheet remain unchanged. If necessary, as a means of applying monetary restraint, the Federal Reserve also has the option of redeeming or selling securities. The redemption or sale of securities would have the effect of reducing the size of the Federal Reserve's balance sheet as well as further reducing the quantity of reserves in the banking system. Restoring the size and composition of the balance sheet to a more normal configuration is a longer-term objective of our policies. In any case, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments and on our best judgments about how to meet the Federal Reserve's dual mandate of maximum employment and price stability.

In sum, in response to severe threats to our economy, the Federal Reserve created a series of special lending facilities to stabilize the financial system and encourage the resumption of private credit flows to American families and businesses. As market conditions and the economic outlook have improved, these programs have been terminated or are being phased out. The Federal Reserve also promoted economic recovery through sharp reductions in its target for the federal funds rate and through large-scale purchases of securities. The economy continues to require the support of accommodative monetary policies. However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus. We have full confidence that, when the time comes, we will be ready to do so.[114]

[edit] Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

The Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF) was also called the AMLF. The Facility began operations on September 22, 2008, and was closed on February 1, 2010.[115]

All U.S. depository institutions, bank holding companies (parent companies or U.S. broker-dealer affiliates), or U.S. branches and agencies of foreign banks were eligible to borrow under this facility pursuant to the discretion of the FRBB.

Collateral eligible for pledge under the Facility was required to meet the following criteria:

[edit] Commercial Paper Funding Facility

The Commercial Paper Funding Facility is also called the CPFF. On October 7, 2008 the Federal Reserve further expanded the collateral it will loan against, to include commercial paper. The action made the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms. Fed officials said they'll buy as much of the debt as necessary to get the market functioning again. They refused to say how much that might be, but they noted that around $1.3 trillion worth of commercial paper would qualify. There was $1.61 trillion in outstanding commercial paper, seasonally adjusted, on the market as of October 1, 2008, according to the most recent data from the Fed. That was down from $1.70 trillion in the previous week. Since the summer of 2007, the market has shrunk from more than $2.2 trillion.[116]

[edit] Quantitative policy

A little-used tool of the Federal Reserve is the quantitative policy. With that the Federal Reserve actually buys back corporate bonds and mortgage backed securities held by banks or other financial institutions. This in effect puts money back into the financial institutions and allows them to make loans and conduct normal business. The Federal Reserve Board used this policy in the early 1990s when the U.S. economy experienced the savings and loan crisis.[citation needed]

The bursting of the United States housing bubble prompted the Fed to buy mortgage-backed securities for the first time in November 2008. Over six weeks, a total of $1.25 trillion were purchased in order stabilize the housing market, about one-fifth of all U.S. government-backed mortgages.[117]

[edit] Quantitative easing

Quantitative easing is another way to influence monetary policy, only recently begun to be used in the United States. Other countries, such as Japan, have provided a template for some Fed actions. Essentially, quantitative easing provides a method for the central bank to provide funds at lower than zero interest rates, in order to increase the monetary supply and combat deflationary forces. This is accomplished by the Fed purchasing U.S. government debt with newly printed U.S. currency. In essence, the Fed is monetizing the debt. In the current (late 2007 to today) macro-economic environment, the slowing velocity of money has induced U.S. central bankers to pursue a variety of new, and to some radical, policies to produce economic stimulus.

[edit] Uncertainties

A few of the uncertainties involved in monetary policy decision making are described by the federal reserve:[118]

[edit] Measurement of economic variables

The Federal Reserve records and publishes large amounts of data. A few websites where data is published are at the Board of Governors Economic Data and Research page,[119] the Board of Governors statistical releases and historical data page,[120] and at the St. Louis Fed's FRED (Federal Reserve Economic Data) page.[121] The Federal Open Market Committee (FOMC) examines many economic indicators prior to determining monetary policy.[122]

[edit] Net worth of households and nonprofit organizations

US household and nonproft net worth 1945-2007.gif

The net worth of households and nonprofit organizations in the United States is published by the Federal Reserve in a report titled, Flow of Funds.[123] At the end of fiscal year 2008, this value was $51.5 trillion.

[edit] Money supply

Components the US money supply (currency, M1 and M2) from 1960 - 2010

The most common measures are named M0 (narrowest), M1, M2, and M3. In the United States they are defined by the Federal Reserve as follows:

Measure Definition
M0 The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
M1 M0 + those portions of M0 held as reserves or vault cash + the amount in demand accounts ("checking" or "current" accounts).
M2 M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
M3 M2 + all other CDs, deposits of eurodollars and repurchase agreements.

The Federal Reserve ceased publishing M3 statistics in March 2006, explaining that it cost a lot to collect the data but did not provide significantly useful information.[124] The other three money supply measures continue to be provided in detail.

[edit] Consumer price index

US consumer price index 1800–2007.
File:U.S. Historical Inflation.svg
Year on year change in the U.S. dollar consumer price index 1914–2006. The ability to maintain a low inflation rate is a long-term measure of the Fed's success.

The consumer price index is used as one measure of the value of money. It is defined as:

A measure of the average price level of a fixed basket of goods and services purchased by consumers as determined by the Bureau of Labor Statistics. Monthly changes in the CPI represent the rate of inflation. Core CPI excludes volatile components, i.e., food and energy prices.

The data consists of the U.S. city average of consumer prices and can be found at The U.S. Department of Labor—Bureau of Labor Statistics[125]

The CPI taken alone is not a complete measure of the value of money. For example, the monetary value of stocks, real estate, and other goods and services categorized as investment vehicles are not reflected in the CPI. It is difficult to obtain a full picture of value across the full range of the cost of living, so the CPI is typically used as a substitute. The CPI therefore has powerful political ramifications, and Administrations of both parties have been tempted to change the basis for its calculation, progressively underestimating the true rate of decline in purchasing power.[126] A controversial method used in calculating CPI is "hedonic adjustments". The basic concept applies a discount for the assumed increased utility of products (i.e. faster CPU processing speeds of computers). However, consumers rarely make decisions based upon the price per computer processing cycle. An argument can be made that such hedonic adjustments significantly contribute to understating true inflation experienced by consumers buying everyday goods and services.[127]

One of the Fed's main roles is to maintain price stability. This means that the change in the consumer price index over time should be as small as possible. The ability to maintain a low inflation rate is a long-term measure of the Fed's success.[128] Although the Fed usually tries to keep the year-on-year change in CPI between 2 and 3 percent,[129] there has been debate among policy makers as to whether or not the Federal Reserve should have a specific inflation targeting policy.[130][131][132]

[edit] Inflation and the economy

There are two types of inflation that are closely tied to each other. Monetary inflation is an increase in the money supply. Price inflation is a sustained increase in the general level of prices, which is equivalent to a decline in the value or purchasing power of money. If the supply of money and credit increases too rapidly over many months (monetary inflation), the result will usually be price inflation. Price inflation does not always increase in direct proportion to monetary inflation; it is also affected by the velocity of money and other factors. With price inflation, a dollar buys less and less over time.[75]

The effects of monetary and price inflation include:[75]

[edit] Unemployment rate

United States unemployment rates 1975–2010 showing variance between the fifty states

The unemployment rate statistics are collected by the Bureau of Labor Statistics. Since one of the stated goals of monetary policy is maximum employment, the unemployment rate is a sign of the success of the Federal Reserve System.[unbalanced opinion]

Like the CPI, the unemployment rate is used as a barometer of the nation's economic health, and thus as a measure of the success of an administration's economic policies. Since 1980, both parties have made progressive changes in the basis for calculating unemployment, so that the numbers now quoted cannot be compared directly to the corresponding rates from earlier administrations, or to the rest of the world.[133]

[edit] Budget

The Federal Reserve is self-funded. The vast majority (90%+) of Fed revenues come from open market operations, specifically the interest on the portfolio of Treasury securities as well as "capital gains/losses" that may arise from the buying/selling of the securities and their derivatives as part of Open Market Operations. The balance of revenues come from sales of financial services (check and electronic payment processing) and discount window loans.[134] The Board of Governors (Federal Reserve Board) creates a budget report once per year for Congress. There are two reports with budget information. The one that lists the complete balance statements with income and expenses as well as the net profit or loss is the large report simply titled, "Annual Report". It also includes data about employment throughout the system. The other report, which explains in more detail the expenses of the different aspects of the whole system, is called "Annual Report: Budget Review". These are comprehensive reports with many details and can be found at the Board of Governors' website under the section "Reports to Congress"[135]

[edit] Net worth

[edit] Balance sheet

One of the keys to understanding the Federal Reserve is the Federal Reserve balance sheet (or balance statement). In accordance with Section 11 of the Federal Reserve Act, the Board of Governors of the Federal Reserve System publishes once each week the "Consolidated Statement of Condition of All Federal Reserve Banks" showing the condition of each Federal Reserve bank and a consolidated statement for all Federal Reserve banks. The Board of Governors requires that excess earnings of the Reserve Banks be transferred to the Treasury as interest on Federal Reserve notes.[136][137]

Below is the balance sheet as of November 7, 2010 (in billions of dollars):

ASSETS:
Gold Stock 11.04
Special Drawing Rights Certificate Acct. 5.20
Treasury Currency Outstanding (Coin) 43.45
Securities Held Outright 2041.71
   U.S. Treasury Securities 839.99
      Bills 18.42
      Notes and Bonds, nominal 772.96
      Notes and Bonds, inflation-indexed 42.98
      Inflation Compensation 5.61
   Federal Agency Debt Securities 149.68
   Mortgage-Backed Securities 1051.04
Repurchase Agreements 0
Term Auction Credit 0
Other Loans 47.15
   Credit Extended to AIG Inc. 19.20
   Term Asset-Backed Securities Loan Facility 27.82
   Other Credit Extended 0.10
Commercial Paper Funding Facility 0
Net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC 68.58
Preferred Interest in AIG Life-Insurance Subsidiaries 26.06
Net Holdings of TALF LLC 0.62
Float -1.67
Central Bank Liquidity Swaps 0.06
Other Assets 99.31
Total Assets 2340.44
LIABILITIES:
Currency in Circulation 964.74
Reverse repurchase agreements 57.39
Deposits 244.96
   Term Deposits 5.11
   U.S. Treasury, general account 34.28
   U.S. Treasury, supplementary financing account 199.96
   Foreign official 2.52
   Service Related 2.40
   Other Deposits 0.70
Funds from AIG, held as agent 6.90
Other Liabilities 74.01
Total liabilities 1348.19
CAPITAL (AKA Net Equity)
Capital Paid In 26.71
Surplus 25.91
Other Capital 4.16
Total Capital 56.78
MEMO (off-balance-sheet items)
Marketable securities held in custody for foreign official and international accounts 3315.70
   U.S. Treasury Securities 2583.90
   Federal Agency Securities 731.80
Securities lent to dealers 4.79
   Overnight 4.79
   Term 0


Total combined assets for all 12 Federal Reserve Banks.
Total combined liabilities for all 12 Federal Reserve Banks.

Analyzing the Federal Reserve's balance sheet reveals a number of facts:

In addition, the balance sheet also indicates which assets are held as collateral against Federal Reserve Notes.

Federal Reserve Notes and Collateral
Federal Reserve Notes Outstanding 1128.63
   Less: Notes held by F.R. Banks 200.90
   Federal Reserve notes to be collateralized 927.73
Collateral held against Federal Reserve notes 927.73
   Gold certificate account 11.04
   Special drawing rights certificate account 5.20
   U.S. Treasury, agency debt, and mortgage-backed securities pledged 911.50
   Other assets pledged 0

[edit] Criticisms

The Federal Reserve System has faced intensified criticism following the Troubled Asset Relief Program of 2008-9. Longtime critics of the Fed gained new audiences as New York Times columnist Frank Rich noted, "Ron Paul and Jim DeMint, political heroes of the tea party right, and Bernie Sanders and Alan Grayson, similarly revered on the left, have found a common cause in vilifying the Federal Reserve Bank and its chairman, Ben Bernanke."[138]

[edit] Influence on economics researchers

Some criticism involves economic data compiled by the Fed. The Fed sponsors much of the monetary economics research in the U.S., and Lawrence H. White objects that this makes it less likely for researchers to publish findings challenging the status quo.[139]

[edit] Accountability

The Federal Reserve System and the individual banks undergo regular audits by the GAO and an outside auditor. GAO audits are limited and do not cover "most of the Fed’s monetary policy actions or decisions, including discount window lending (direct loans to financial institutions), open-market operations and any other transactions made under the direction of the Federal Open Market Committee" ...[nor may the GAO audit] "dealings with foreign governments and other central banks." [140] Various statutory changes, including the Federal Reserve Transparency Act, have been proposed to broaden the scope of the audits. Bloomberg L.P. News brought a lawsuit against the Board of Governors of the Federal Reserve System to force the Board to reveal the identities of firms for which it has provided guarantees.[141] Bloomberg, L.P. won at the trial court level,[142] and as of early September 2010 the case is on appeal at the United States Court of Appeals for the Second Circuit.[143]

[edit] Role in business cycles and inflation

Adherents of the Austrian School of economic theory blame the economic crisis in the late 2000s[144] on the Federal Reserve's policy, particularly under the leadership of Alan Greenspan, of credit expansion through historically low interest rates starting in 2001, which they claim enabled the United States housing bubble.

[edit] See also

[edit] References

  1. ^ a b c "Born of a panic: Forming the Federal Reserve System". The Federal Reserve Bank of Minneapolis. August 1988. http://www.minneapolisfed.org/pubs/region/88-08/reg888a.cfm. 
  2. ^ a b c BoG 2006, pp. 1 "Just before the founding of the Federal Reserve, the nation was plagued with financial crises. At times, these crises led to 'panics,' in which people raced to their banks to withdraw their deposits. A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. Initially created to address these banking panics, the Federal Reserve is now charged with a number of broader responsibilities, including fostering a sound banking system and a healthy economy."
  3. ^ BoG 2005, pp. 1–2
  4. ^ BoG 2005, pp. 1 "It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded."
  5. ^ Reform of the Federal Reserve System in the Early 1930's: The Politics of Money and Banking, by Sue C. Patrick, Garland, 1993.
  6. ^ a b FRB: Mission
  7. ^ BoG 2005, pp. v (See structure)
  8. ^ Federal Reserve Online
  9. ^ Advisory Councils - http://www.federalreserve.gov/aboutthefed/advisorydefault.htm
  10. ^ "Coins and Currency". US Dept of Treasury website. http://www.treas.gov/topics/currency/. Retrieved 8 July 2010. 
  11. ^ Federal Reserve website - http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#5
  12. ^ Irwin, Neil (January 12, 2010), "Federal Reserve earned $45 billion in 2009", The Washington Post, http://www.washingtonpost.com/wp-dyn/content/article/2010/01/11/AR2010011103892.html, retrieved July 6, 2010 
  13. ^ a b c d Flamme, Karen. "1995 Annual Report: A Brief History of Our Nation's Paper Money". Federal Reserve Bank of San Francisco. http://www.frbsf.org/publications/federalreserve/annual/1995/history.html. Retrieved August 26, 2010. 
  14. ^ Grubb, Farley (March 30, 2006). "Benjamin Franklin And the Birth of a Paper Money Economy" (PDF). Federal Reserve Bank of Philadelphia. http://www.philadelphiafed.org/publications/economic-education/ben-franklin-and-paper-money-economy.pdf. Retrieved August 26, 2010. 
  15. ^ "U.S. Constitution: Article I". http://caselaw.lp.findlaw.com/data/constitution/article01/37.html. Retrieved September 2010. 
  16. ^ Committee of Finance and Industry. 1931. (Macmillan Report). description of the founding of Bank of England: "Its foundation in 1694 arose out the difficulties of the Government of the day in securing subscriptions to State loans. Its primary purpose was to raise and lend money to the State and in consideration of this service it received under its Charter and various Act of Parliament, certain privileges of issuing bank notes. The corporation commenced, with an assured life of twelve years after which the Government had the right to annul its Charter on giving one year's notice. Subsequent extensions of this period coincided generally with the grant of additional loans to the State"
  17. ^ Remarks by Chairman Alan Greenspan – "Our banking history". May 2, 1998
  18. ^ "The Fed Today". See the "Lesson Plans" pdf document. p. 20.
  19. ^ Historical Beginnings...The Federal Reserve. (1999). Chapter 1.
  20. ^ a b c Johnson, Roger (December 1999). "Historical Beginnings... The Federal Reserve". Federal Reserve Bank of Boston. p. 8. http://www.bos.frb.org/about/pubs/begin.pdf. Retrieved 2010-07-23. 
  21. ^ Herrick, Myron (March 1908). "The Panic of 1907 and Some of Its Lessons". Annals of the American Academy of Political and Social Science. http://links.jstor.org/sici?sici=0002-7162(190803)31%3C8%3ATPO1AS%3E2.0.CO%3B2-7. 
  22. ^ a b Flaherty, Edward (June 16, 1997, updated August 24, 2001). "A Brief History of Central Banking in the United States". Netherlands: University of Groningen. http://odur.let.rug.nl/~usa/E/usbank/bank00.htm. 
  23. ^ a b Whithouse, Michael (May 1989). "Paul Warburg's Crusade to Establish a Central Bank in the United States". The Federal Reserve Bank of Minneapolis. http://www.minneapolisfed.org/pubs/region/89-05/reg895d.cfm. 
  24. ^ a b c "Paul Warburg's Crusade to Establish a Central Bank in the United States". The Federal Reserve Bank of Minneapolis. http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3815. 
  25. ^ a b c d "America's Unknown Enemy: Beyond Conspiracy". American Institute of Economic Research. http://www.cooperativeindividualism.org/aier_on_conspiracy_04.html. 
  26. ^ http://www.scribd.com/doc/17411624/Congressional-Record-Dec-22-1913-pg1465
  27. ^ http://www.scribd.com/doc/17234309/Congressional-Record-Dec-23-1913
  28. ^ BoG 2005, pp. 2
  29. ^ This quote is found on the original paperwork written by congress when the act was debated and passed. It used to be at the top of the official Federal Reserve Act page on the official Federal Reserve Board of Governors website (http://www.federalreserve.gov/GeneralInfo/fract/), but as of the August 2008 website revision, this quote as been removed. It can be found in old copies, which are available in books such as, The Federal reserve act by Clarence Walker Barron (1914). p. 151. "An Act To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes."
  30. ^ a b BoG 2006, pp. 1
  31. ^ Deflation: Making Sure "It" Doesn't Happen Here Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. November 21, 2002
  32. ^ Bernanke, Ben (2003-10-24). "Remarks by Governor Ben S. Bernanke: At the Federal Reserve Bank of Dallas Conference on the Legacy of Milton and Rose Friedman's Free to Choose, Dallas, Texas" (text). http://www.federalreserve.gov/boardDocs/Speeches/2003/20031024/default.htm. 
  33. ^ BoG 2005, pp. 113
  34. ^ BoG 2005, pp. 83
  35. ^ lender of last resort, Federal Reserve Bank of Minneapolis, retrieved May 21, 2010
  36. ^ The Creature from Jekyll Island; Author: G. Edward Griffin; (C) 1994 G. Edward Griffin
  37. ^ a b c The Federal Reserve, Monetary Policy and the Economy—Everyday Economics—FRB Dallas
  38. ^ Press Release: Federal Reserve Board, with full support of the Treasury Department, authorizes the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) (September 16, 2008). Board of Governors of the Federal Reserve.
  39. ^ Andrews, Edmund L.; Michael J. de la Merced and Mary Williams Walsh (2008-09-16). "Fed's $85 Billion Loan Rescues Insurer". New York times. http://www.nytimes.com/2008/09/17/business/17insure.html?hp. Retrieved 2008-09-17. 
  40. ^ Federal Reserve Bank of New York. "How Currency Gets into Circulation", referenced 2010-03-06.
  41. ^ Bureau of Engraving and Printing. "Annual Production Figures", referenced 2010-03-06.
  42. ^ Federal Reserve Bank of New York. Federal Funds
  43. ^ Federal Reserve Bank of Richmond. Instruments of the Money Market: Chapter 2—Federal Funds
  44. ^ FRB: Speech-Kohn, The Evolving Role of the Federal Reserve Banks-November 3, 2006
  45. ^ "Frequently Asked Questions Federal Reserve System". http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm. Retrieved 2010-02-19.  The Board of Governors, the Federal Reserve Banks, and the Federal Reserve System as a whole are all subject to several levels of audit and review. Under the Federal Banking Agency Audit Act (enacted in 1978 as Public Law 95-320), which authorizes the Comptroller General of the United States to audit the Federal Reserve System, the Government Accountability Office (GAO) has conducted numerous reviews of Federal Reserve activities.
  46. ^ "Federal Reserve System Current and Future Challenges Require System wide Attention". United States General Accounting Office. http://www.google.com/url?sa=t&source=web&ct=res&cd=6&ved=0CB4QFjAF&url=http%3A%2F%2Fwww.gao.gov%2Fcgi-bin%2Fgetrpt%3FGAO%2FT-GGD-96-159&ei=cMKBS6f-DYSkswOAzImfBA&usg=AFQjCNGtXyWlR1nymi8FsgEubrduk8Vdhw&sig2=PAqnFO5q2d_bt66NLRU8Nw. Retrieved 2010-02-19.  Under the Federal Banking Agency Audit Act, 31 U.S.C. section 714(b), our audits of the Federal Reserve Board and Federal Reserve banks may not include (1) transactions for or with a foreign central bank or government, or nonprivate international financing organization; (2) deliberations, decisions, or actions on monetary policy matters; (3) transactions made under the direction of the Federal Open Market Committee; or (4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items (1), (2), or (3). See Federal Reserve System Audits: Restrictions on GAO's Access (GAO/T-GGD-94-44), statement of Charles A. Bowsher. The real purpose of this historic "duck hunt" was to formulate a plan for U.S. banking and currency reform that Aldrich could present to Congress.
  47. ^ "About The Audit". http://www.auditthefed.com/about-the-audit/. Retrieved 2010-02-19.  Although the Fed is currently audited by outside agencies, these audits are not thorough and do not include monetary policy decisions or agreements with foreign central banks and governments. The crucial issue of Federal Reserve transparency requires an analysis of 31 USC 714, the section of U.S. Code which establishes that the Federal Reserve may be audited by the Government Accountability Office (GAO), but which simultaneously severely restricts what the GAO may in fact audit. Essentially, the GAO is only allowed to audit check-processing, currency storage and shipments, and some regulatory and bank examination functions, etc. The most important matters, which directly affect the strength of the dollar and the health of the financial system, are immune from oversight.
  48. ^ "An Open Letter to the U.S. House of Representatives". http://www.auditthefed.com/. Retrieved 2010-02-19.  Whereas: Congress, the Federal Reserve, and the U.S. Treasury have put the American taxpayer on the hook for over $12 trillion in bailouts and loans; and Whereas: Federal Reserve Chairman Ben Bernanke recently refused to tell Congress who has received trillions in these funds from the Federal Reserve; and Whereas: Allowing the Fed to operate our nation's monetary system in almost complete secrecy leads to abuse, inflation, and a lower quality of life for every American; and Whereas: HR 1207, the Federal Reserve Transparency Act, and S 604, the Federal Reserve Sunshine Act, would require a full audit of the Fed for the first time in its history and would provide answers to the American people about how our money is being spent;
  49. ^ Reddy, Sudeep (November 23, 2009). "Congress Grows Fed Up Despite Central Bank's Push". The Wall Street Journal. http://online.wsj.com/article/SB125876136781358287.html. Retrieved 2010-02-19. The Fed's ability to influence Congress is diluted by public anger. A July 2009 Gallup Poll found only 30% Americans thought the Fed was doing a good or excellent job, a rating even lower than that for the Internal Revenue Service, which drew praise from 40%.
  50. ^ "Fed Intends to Hire Lobbyist in Campaign to Buttress Its Image". http://www.bloomberg.com/apps/news?pid=20601087&sid=aZjQKyLci1AM. Retrieved 2010-02-19. Linda Robertson currently handles government, community and public affairs at Johns Hopkins University in Baltimore, and headed the Washington lobbying office of Enron Corp., the energy trading company that collapsed in 2002 after an accounting scandal. She was also an adviser to all three of the Clinton administration's Treasury secretaries.
  51. ^ "Board Actions taken during the week ending July 25, 2009". http://www.federalreserve.gov/releases/h2/20090725/default.htm. Retrieved 2010-02-19. Office of Board Members -- appointment of Linda L. Robertson as assistant to the Board. -Announced, July 20, 2009
  52. ^ "VP Linda Robertson to join Federal Reserve System". http://gazette.jhu.edu/2009/06/08/vp-linda-robertson-to-join-federal-reserve-system/. Retrieved 2010-02-19. Linda Robertson, vice president of government, community and public affairs for the university and vice president for government affairs and community relations at Johns Hopkins Medicine, will become assistant to the Board of Governors of the Federal Reserve System. In that role, which she will assume July 18, she will be senior adviser to Chairman Ben S. Bernanke and the other governors of the Fed on strategic planning and day-to-day issues involving their interactions with the Congress.
  53. ^ Mark Calabria, Bert Ely, Congressman Ron Paul, Gilbert Schwartz. (2009-06-24). Ron Paul: Bringing Transparency to the Federal Reserve. Cato Institute Washington, D.C.. Event occurs at 00:11:04. http://fora.tv/2009/06/24/Ron_Paul_Bringing_Transparency_to_the_Federal_Reserve. Retrieved 2010-02-21. "For once, I think its the first time, the Federal Reserve has hired a lobbyist to lobby members of congress against this bill. And guess where the lobbyist came from? She's a hangover from Enron. She lobbied for Enron! So that's very appropriate." 
  54. ^ BoG 2005, pp. 4–5
  55. ^ U.S. Code Title 12, Chapter 3, Subchapter 7, Section 301. Powers and duties of board of directors; suspension of member bank for undue use of bank credit
  56. ^ U.S. Code: Title 18, Part 1, Chapter 47, section 1014. Loan and credit applications generally; renewals and discounts; crop insurance
  57. ^ BoG 2005, pp. 83–85
  58. ^ Federal Reserve Board: Payments Systems
  59. ^ a b FRB: FAQs: Federal Reserve System
  60. ^ 12 U.S.C. § 247.
  61. ^ See 12 U.S.C. § 241
  62. ^ FRB: Board Members
  63. ^ Membership of the Board of Governors of the Federal Reserve System, 1914–Present
  64. ^ "Laws of the Fed". http://blogs.ft.com/money-supply/2010/07/07/laws-of-the-fed/. Retrieved July, 14 2010. 
  65. ^ BoG 2005, pp. 11–12
  66. ^ FRB: Federal Reserve Bank Presidents
  67. ^ US CODE: Title 12,SUBCHAPTER VII—DIRECTORS OF FEDERAL RESERVE BANKS; RESERVE AGENTS AND ASSISTANTS
  68. ^ "Who owns the Federal Reserve Bank?". http://www.factcheck.org/askfactcheck/who_owns_the_federal_reserve_bank.html. Retrieved October, 16 2010. 
  69. ^ "Business Encyclopedia:Federal Reserve System". http://www.answers.com/topic/fed-federal-reserve-system. Retrieved July, 13 2010. 
  70. ^ Woodward, G. Thomas (1996-07-31). "Money and the Federal Reserve System: Myth and Reality - CRS Report for Congress, No. 96-672 E". Congressional Research Service Library of Congress. http://home.hiwaay.net/~becraft/FRS-myth.htm. Retrieved 2008-11-23. 
  71. ^ The Federal Reserve Board 2009 Annual Report - Federal Reserve Banks Combined Financial Statements
  72. ^ a b Kennedy C. Scott v. Federal Reserve Bank of Kansas City, et al., 406 F.3d 532 (8th Cir. 2005).
  73. ^ 680 F.2d 1239 (9th Cir. 1982).
  74. ^ a b FRB: Federal Open Market Committee
  75. ^ a b c d Federal Reserve Education—Monetary Policy Basics
  76. ^ a b BoG 2005, pp. 27
  77. ^ The Federal Reserve System In Action—Federal Reserve Bank of Richmond
  78. ^ FRB: Monetary Policy, Open Market Operations
  79. ^ FRB: Monetary Policy, the Discount Rate
  80. ^ a b FRB: Monetary Policy, Reserve Requirements
  81. ^ "Open Market Operations". New York Federal Reserve Bank. August 2007. http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html. Retrieved October 2010. 
  82. ^ Repurchase and Reverse Repurchase Transactions—Fedpoints—Federal Reserve Bank of New York
  83. ^ Federal Reserve Bank San Francisco( 2004)
  84. ^ Patricia S. Pollard (February 2003). "A Look Inside Two Central Banks: The European Central Bank And The Federal Reserve". Review (magazine) (St. Louis, Missouri: Federal Reserve Bank of St. Louis) 85 (2): 11–30. doi:10.3886/ICPSR01278. OCLC 1569030. 
  85. ^ BoG 2005, pp. 30
  86. ^ BoG 2005, pp. 29–30
  87. ^ BoG 2005, pp. 31
  88. ^ Reserve Requirements: History, Current Practice, and Potential Reform
  89. ^ http://www.federalreserve.gov/monetarypolicy/20081006a.htm
  90. ^ a b c FRB: Temporary Auction Facility FAQ
  91. ^ FRB: Press Release-Federal Reserve intends to continue term TAF auctions as necessary-December 21, 2007
  92. ^ Federal Reserve press release—Announcement of the creation of the Term Securities Lending Facility: http://federalreserve.gov/newsevents/press/monetary/20080311a.htm
  93. ^ "Fed Seeks to Limit Slump by Taking Mortgage Debt". bloomberg.com. 12 March 2008. http://www.bloomberg.com/apps/news?pid=20601103&sid=a6aFI7RKVhEA&refer=news.  "The step goes beyond past initiatives because the Fed can now inject liquidity without flooding the banking system with cash...Unlike the newest tool, the past steps added cash to the banking system, which affects the Fed's benchmark interest rate...By contrast, the TSLF injects liquidity by lending Treasuries, which doesn't affect the federal funds rate. That leaves the Fed free to address the mortgage crisis directly without concern about adding more cash to the system than it wants"
  94. ^ Federal Reserve Announces Establishment of Primary Dealer Credit Facility—Federal Reserve Bank of New York
  95. ^ Bloomberg.com: Economy
  96. ^ a b Primary Dealer Credit Facility: Frequently Asked Questions—Federal Reserve Bank of New York
  97. ^ Fed Announces Emergency Steps to Ease Credit Crisis - Economy * US * News * Story - CNBC.com
  98. ^ Federal Reserve Bank of Atlanta—Examining the Federal Reserve's New Liquidity Measures
  99. ^ "Reserve Requirements of Depository Institutions Policy on Payment System Risk," 75 Federal Register 86 (5 May 2010), pp. 24384 - 24389.
  100. ^ "Announcement of the creation of the Term Auction Facility—FRB: Press Release--Federal Reserve and other central banks announce measures designed to address elevated pressures in short-term funding markets". federalreserve.gov. 12 December 2007. http://www.federalreserve.gov/newsevents/press/monetary/20071212a.htm. 
  101. ^ "US banks borrow $50bn via new Fed facility". Financial Times. 18 February 2008. http://www.ft.com/cms/s/66db756a-de5d-11dc-9de3-0000779fd2ac.html.  'Before its introduction, banks either had to raise money in the open market or use the so-called "discount window" for emergencies. However, last year many banks refused to use the discount window, even though they found it hard to raise funds in the market, because it was associated with the stigma of bank failure.'
  102. ^ "Fed Boosts Next Two Special Auctions to $30 Billion". bloomberg.com. 4 January 2008. http://www.bloomberg.com/apps/news?pid=20601103&refer=news&sid=aBPbErlft9cI.  "The Board of Governors of the Federal Reserve System established the temporary Term Auction Facility, dubbed TAF, in December to provide cash after interest-rate cuts failed to break banks' reluctance to lend amid concern about losses related to subprime mortgage securities. The program will make funding from the Fed available beyond the 20 authorized primary dealers that trade with the central bank."
  103. ^ economist.com—A dirty job, but someone has to do it: http://www.economist.com/displaystory.cfm?story_id=10286586 A quote from the article:
    The Fed's discount window, for instance, through which it lends direct to banks, has barely been approached, despite the soaring spreads in the interbank market. The quarter-point cuts in its federal funds rate and discount rate on December 11 were followed by a steep sell-off in the stockmarket...The hope is that by extending the maturity of central-bank money, broadening the range of collateral against which banks can borrow and shifting from direct lending to an auction, the central bankers will bring down spreads in the one- and three-month money markets. There will be no net addition of liquidity. What the central bankers add at longer-term maturities, they will take out in the overnight market.

    But there are risks. The first is that, for all the fanfare, the central banks' plan will make little difference. After all, it does nothing to remove the fundamental reason why investors are worried about lending to banks. This is the uncertainty about potential losses from subprime mortgages and the products based on them, and—given that uncertainty—the banks' own desire to hoard capital against the chance that they will have to strengthen their balance sheets.

  104. ^ economist.com—Unclogging the system: http://www.economist.com/daily/news/displaystory.cfm?story_id=10278482&top_story=1
  105. ^ a b Fed, top central banks to flood markets with cash
  106. ^ Chairman Ben S. Bernanke—The economic outlook Before the Committee on the Budget, U.S. House of Representatives January 17, 2008: http://www.federalreserve.gov/newsevents/testimony/bernanke20080117a.htm
  107. ^ Term Securities Lending Facility: Frequently Asked Questions: http://www.newyorkfed.org/markets/tslf_faq.html
  108. ^ "Interest on Required Reserve Balances and Excess Balances". Federal Reserve Board. 2008-10-06. http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm. Retrieved 2008-10-14. 
  109. ^ "Press Release - October 22, 2008". Federal Reserve Board. 2008-10-22. http://www.federalreserve.gov/newsevents/press/monetary/20081022a.htm. Retrieved 2008-10-22. 
  110. ^ "Federal Reserve Board approves amendments to Regulation D authorizing Reserve Banks to offer term deposits." April 30, 2010
  111. ^ Board authorizes small-value offerings of term deposits under the Term Deposit Facility. May 10, 2010
  112. ^ Board authorizes ongoing small-value offerings of term deposits under the Term Deposit Facility. September 8, 2010
  113. ^ Zumbrun, Joshua (September 8, 2010). "Fed to Sell Term Deposits to Ensure Exit 'Readiness'". Bloomberg. http://www.bloomberg.com/news/2010-09-08/fed-to-sell-5-billion-of-term-deposits-to-ensure-readiness-.html. Retrieved September 10, 2010. 
  114. ^ Testimony before the House Committee on Financial Services regarding "Unwinding Emergency Federal Reserve Liquidity Programs and Implications for Economic Recovery." March 25, 2010., also at GPO Access Serial No. 111–118 Retrieved September 10, 2010
  115. ^ Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. Board of Governors of the Federal Reserve System. http://www.federalreserve.gov/monetarypolicy/abcpmmmf.htm. Retrieved May 27, 2010 
  116. ^ Fed Action
  117. ^ http://www.npr.org/templates/transcript/transcript.php?storyId=129451895
  118. ^ BoG 2005, pp. 18–21
  119. ^ FRB: Economic Research & Data
  120. ^ Federal Reserve Board - Statistics: Releases and Historical Data
  121. ^ St. Louis Fed: Economic Data - FRED
  122. ^ a b Federal Reserve Education - Economic Indicators
  123. ^ FRB: Z.1 Release—Flow of Funds Accounts of the United States, Release Dates See the pdf documents from 1945 to 2007. The value for each year is on page 94 of each document (the 99th page in a pdf viewer) and duplicated on page 104 (109th page in pdf viewer). It gives the total assets, total liabilities, and net worth. This chart is of the net worth.
  124. ^ Discontinuance of M3
  125. ^ ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
  126. ^ Kevin Phillips: Numbers Racket—Why the Economy is Worse than We Know, Harper's, May 2008
  127. ^ [1]
  128. ^ BoG 2006, pp. 10
  129. ^ "These definitions make clear a commitment to low inflation. But they leave open whether, for example, the inflation rate prevailing today--about 2½ percent for the core consumer price index (CPI) measure of consumer prices--is consistent with this definition." http://www.federalreserve.gov/boarddocs/speeches/2001/20010717/default.htm
  130. ^ FRB Speech, Bernanke-A perspective on inflation targeting-March 25, 2003
  131. ^ What's The Fuss Over Inflation Targeting?
  132. ^ Bernanke, Ben S.: The Inflation-Targeting Debate
  133. ^ Kevin Phillips: Numbers Racket—Why the Economy is Worse than We Know, Harper's May 2008.
  134. ^ Chicago Fed—Demonstrating Knowledge of the Fed: http://www.chicagofed.org/education_resources/files/Demonstrating_Knowledge.ppt
  135. ^ Federal Reserve Board—Reports to Congress
  136. ^ http://www.federalreserve.gov/boarddocs/rptcongress/annual08/pdf/AR08.pdf Annual Report Page 466 (o) Interest on Federal Reserve Notes
  137. ^ "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks". Federal Reserve. http://www.federalreserve.gov/releases/h41/Current/. Retrieved 2008-03-20. 
  138. ^ Quoted in Scott Rasmussen and Doug Schoen. Mad As Hell: How the Tea Party Movement Is Fundamentally Remaking Our Two-Party System (2010) p 57
  139. ^ White, Lawrence H. (August 2005). "The Federal Reserve System's Influence on Research in Monetary Economics". Econ Journal Watch 2(2): 325–354. Retrieved June 23, 2010.
  140. ^ Reddy, Sudeep (August 31, 2009). "What would a federal reserve audit show". The Wall Street Journal. Retrieved June 23, 2010.
  141. ^ Ryan Chittum, August 25, 2009, "Bloomberg Wins Its Lawsuit Against the Federal Reserve," at [2].
  142. ^ Docket entry 31, Bloomberg, L.P. v. Board of Governors of the Federal Reserve System, case no. 1:08-cv-09595-LAP, U.S. District Court for the District of New York.
  143. ^ At the Court of Appeals, case no. 09cv4083.
  144. ^ O'Driscoll, Gerald P. Jr. (April 20, 2010). "An Economy of Liars". The Wall Street Journal. Retrieved June 23, 2010.

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