 The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central bank of the United States.
The Federal Reserve System is composed of a central Board of Governors in Washington, D.C. and twelve regional Federal Reserve Banks located in major cities throughout the nation. Alan Greenspan currently serves as the Chairman of the Board of Governors of Federal Reserve.
History
Main article: History of the Federal Reserve
Early in 1907, New York Times Annual Financial Review published Paul Warburg's (a partner of Kuhn, Loeb and Co.) first official reform plan, entitled "A Plan for a Modified Central Bank," in which he outlined remedies that he thought might avert panics. Early in 1907, Jacob Schiff, the chief executive of Kuhn, Loeb and Co., in a speech to the New York Chamber of Commerce, warned that "unless we have a Central Bank with adequate control of credit resources, this country is going to undergo the most severe and far reaching money panic in its history." "The Panic of 1907" hit full stride in October. Other financial persons who advocated a central bank with an elastic currency after the Panic of 1907 include Frank Vanderlip, Myron T. Herrick, William Barret Ridgely, George E. Roberts, Isaac N. Seligman and Jacob H. Schiff. See, Myron T. Herrick "The Panic of 1907 and Some of Its Lessons", Annals of the American Academy of Political and Social Science, vol. 31 (Jan.-June 1908), as reported by Charles P. Kindleberger "Manias, Panics, and Crashes" (4th ed.). It is significant that all of these people save Seligman were unqualified in their advocacy of a central-bank elastic currency (i.e., expanding during a boom and contracting during a bust), despite the U.S. enjoying robust growth without a central bank, and that Herrick thought 'the laws of finance are...as sure in their operation as the laws of physics." According to monetarists, the Great Depression started as a severe recession and grew worse due to mismanagement of the money supply by the Federal Reserve (see, generally, Milton Friedman and Anna J. Schwartz, "A Monetary History of the United States, 1867-1960")
The Fed was created by the U.S. Congress through the passing of the Owen-Glass Act, signed by President Woodrow Wilson on December 23, 1913.
Roles and responsibilities
The main tasks of the Federal Reserve are:
- Supervise and Regulate banks
- Implement Monetary Policy by buying and selling U.S. Treasury Bonds
- Maintain a strong payments system
- Feds cannot issue U.S. Treasury Bonds
Other tasks include:
- Economic education
- Community outreach
- Economic research
Organization of the Federal Reserve  Federal Reserve headquarters, Eccles Building, Washington, DC. The Federal Reserve is comprised of a board of governors. The 7 members of the board are appointed by the President and confirmed by the Senate. Members are elected to terms of 14 years, with the ability to serve for no more than one term. A governor may serve the remainder of another governor's term in addition to their own full term. The Federal Open Market Committee (FOMC) comprises the 7 members of the board of governors and 5 representatives selected from the Federal Reserve Banks. The representative from the 2nd District, New York, is a permanent member, while the rest of the banks rotate on two and three year intervals.
The current members of the Board of Governors are:
Interest rates
 The effective federal funds rate charted over fifty years The Fed implements monetary policy largely by steering the federal funds rate, also called the overnight rate, using open market operations. This is the interest rate that banks charge each other for overnight loans to each other. This in turn influences the prime rate which is usually about 3 percentage points higher than the federal funds rate. This prime rate is the rate that most banks price their loans at for their best customers.
Lower interest rates stimulate economic activity by lowering the cost of borrowing, making it easier for consumers and businesses to buy and build. Higher interest rates slow the economy by increasing the cost of borrowing. (See monetary policy for a fuller explanation.)
The Fed usually adjusts the federal funds rate by 0.25 or 0.50 percentage points at a time. From early 2001 to mid 2003 the Fed lowered its interest rates 13 times, from 6.25 to 1.00 percent, to fight recession. In November 2002, rates were cut to 1.75, and many interest rates went below the inflation rate. On June 25, 2003, the federal funds rate was lowered to 1.00 percent, its lowest nominal rate since July, 1958, when the overnight rate averaged 0.68 percent. Starting at the end of June, 2004, the Fed started to raise the target interest rate in response to concerns about the potential for increased inflation from a too-active economy. As of December, 2004, the rate is at 2.25 percent following a series of small increments.
Who owns the Federal Reserve?
The Federal Reserve claims that nobody owns it – that it is an “independent entity within the government.” The Federal Reserve is subject to laws such as the Freedom of Information Act and the Privacy Act which cover Federal agencies but not private corporations; yet Congress gave the Federal Reserve the autonomy to carry out its responsibilities insulated from political pressure. Each of the Fed's three parts – the Board of Governors, the regional Reserve banks and the Federal Open Market Committee – operates independently of the federal government to carry out the Fed's core responsibilities. Once a member of the Board of Governors is appointed, he or she can be as independent as a U.S. Supreme Court judge, though the term is shorter.
Influence of Government
As the nation's central bank, the Federal Reserve derives its authority from the US Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. The Fed's financial independence arises because it is hugely profitable, among others, due to its ownership of government bonds. It returns billions of dollars to the government each year. However, the Federal Reserve is subject to oversight by the Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government..
The Reserve Banks
The twelve regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation's central banking system, are organized much like private corporations—possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year.[1] (http://minneapolisfed.org/info/sys/faq/frs.cfm#3)
The Federal Reserve System, frequently referred to as simply the Federal Reserve Bank or "The Fed," was created via the Federal Reserve Act of 1913 which "established a new central bank designed to add both flexibility and strength to the nation's financial system. The legislation provided for a system that included a number of regional Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks could join. The Reserve Banks opened for business in November 1914. Congress created Federal Reserve notes to provide the nation with an elastic supply of currency. The notes were to be issued to Reserve Banks for subsequent transmittal to banking institutions in accordance with the needs of the public.
Fractional reserve banking
Main article: fractional reserve banking
The common practice by banks of retaining only a fraction of their deposits to satisfy demands for withdrawals, lending the remainder at interest to obtain income that can be used to pay interest to depositors and provide profits for the banks' owners.
Money creation
Main article: money creation
The regulation of the creation of new money in the economy by commercial and central banks.
Criticism
Main article: Criticism of the Federal Reserve
Criticism of the federal reserve include what may be general critisism of a central bank system, for example that it cartelizes the banking industry and monopolizes the creation of money. And what may be specific federal reserve criticism, that it profits illegally, and causes inflation.
Further reading
- Greider, William (1987). Secrets of the Temple. Simon & Schuster. ISBN 0671675567; a book intended for lay readers explaining the structures, functions, and history of the Federal Reserve.
- Epstein, Lita & Martin, Preston (2003). The Complete Idiot's Guide to the Federal Reserve. Alpha Books. ISBN 0028643232.
- Meyer, Lawrence H (2004). A Term at the Fed : An Insider's View. HarperBusiness. ISBN 0060542705.
- Rothbard, Murray N. (1994). The Case Against the Fed. Ludwig Von Mises Institute. ISBN 094546617X.
See also
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