Federal Reserve System

Examples of Federal Reserve System in the following topics:

• Introduction to the Federal Reserve

  • The Federal Reserve System is the central banking system of the United States, which conducts the nation's monetary policy.
  • The Federal Reserve System (also known as the Federal Reserve, or the "Fed") is the central banking system of the United States.
  • Over time, the roles and responsibilities of the Federal Reserve System have expanded, and its structure has evolved.
  • Monthly changes in the currency component of the U.S. money supply as reported by the Federal Reserve
  • Describe the primary function and objectives of the Federal Reserve System

• Structure of the Federal Reserve

  • The Federal Reserve System (The Fed) was designed in order to maintain the central bank's independence and promote decentralized power.
  • Twelve regional Federal Reserve Banks located in major cities throughout the nation, which divide the nation into twelve Federal Reserve districts.
  • The Federal Reserve Banks act as fiscal agents for the U.S.
  • The diagram shows the relationship between the different organizations that compose the Federal Reserve System
  • Recall the structure of the Federal Reserve System of the United States

• Websites

• The Changing Federal Role in the Economy

  • In the United States, the Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) serves as the central mechanism for understanding federal intervention (and de-entanglement) with the economy.
  • The central banking system of the United States, the Fed was created on December 23, 1913, with the enactment of the Federal Reserve Act.
  • Over time, the roles and responsibilities of the Federal Reserve System have expanded, and its structure has evolved.
  • The Federal Reserve System acts as the central mechanism for federal intervention in the U.S. economy.
  • Explain the role and the historical origins of the Federal Reserve System in the early 20th century

• Money in the U.S. Economy

  • Monetary policy is the province of the Federal Reserve System, an independent U.S. government agency.
  • All nationally chartered commercial banks are required by law to be members of the Federal Reserve System; membership is optional for state-chartered banks.
  • In general, a bank that is a member of the Federal Reserve System uses the Reserve Bank in its region in the same way that a person uses a bank in his or her community.
  • The Federal Reserve Board of Governors administers the Federal Reserve System.
  • Although the Federal Reserve System periodically must report on its actions to Congress, the governors are, by law, independent from Congress and the president.

• The Lender of Last Resort

  • Federal Reserve as the "lender of last resort" extends credit to financial institutions unable to obtain credit elsewhere.
  • 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.
  • 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).
  • 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.
  • Explain why the Federal Reserve serves as the "lender of last resort"

• The Federal Reserve Act

  • President Wilson secured passage of the Federal Reserve Act in late 1913.
  • President Wilson secured passage of the Federal Reserve Act in late 1913, as an attempt to carve out a middle ground between conservative Republicans, led by Senator Nelson W.
  • Wilson named Paul Warburg and other prominent bankers to direct the Federal Reserve.
  • The new system began operations in 1915, playing a significant role in financing the Allied and American war effort.
  • Despite the fact that the Act intended to diminish the influence of the New York banks, the New York branch continued to dominate the Federal Reserve until the New Deal reorganized and strengthened the Federal Reserve in the 1930s.

• The Fractional Reserve System

  • A fractional reserve system is one in which banks hold reserves whose value is less than the sum of claims outstanding on those reserves.
  • This is called the fractional-reserve banking system: banks only hold a fraction of total deposits as cash on hand.
  • The fraction of deposits that a bank must hold as reserves rather than loan out is called the reserve ratio (or the reserve requirement) and is set by the Federal Reserve.
  • Any reserves beyond the required reserves are called excess reserves.
  • Excess reserves plus required reserves equal total reserves.

• Reserve Requirement

  • The Fed rarely changes the reserve requirements because changes in the reserve requirements have a significant and disruptive impact on the banking system.
  • Small changes in the reserve requirement could have an enormous impact on the banking system and the money supply.
  • Purpose of reserve requirements is to make deposits safe and maintain a stable banking system.
  • Thus, reserve requirements would not prevent bank runs and does not stabilize the banking system.
  • Moreover, the U.S. government could eliminate federal deposit insurance and substantially reduce bank regulations.

• The Reserve Requirement

  • The Federal Reserve is in charge of setting reserve requirements for all depository institutions in the country.
  • The Federal Reserve can adjust reserve requirements by changing required reserve ratios, the liabilities to which the ratios apply, or both.
  • Nonetheless, reserve requirements play a useful role in the conduct of open market operations by helping to ensure a predictable demand for Federal Reserve balances and thus enhancing the Federal Reserve's control over the federal funds rate.
  • Requiring depository institutions to hold a certain fraction of their deposits in reserve, either as cash in their vaults or as non-interest-bearing balances at the Federal Reserve, does impose a cost on the private sector.
  • Unless it is accompanied by an increase in the supply of Federal Reserve balances, an increase in reserve requirements (through an increase in the required reserve ratio, for example) reduces excess reserves, induces a contraction in bank credit and deposit levels, and raises interest rates.