Federal Reserve System

The Federal Reserve System is the United States’ central depository authority that operates as a financial representative for the American regime and is the guardian of the reserve financial records of the profit-making stores. Besides, the Federal Reserve System is accountable for creating loans to the commercial reservoirs and for overseeing the currency supply, and that is inclusive of the coin, in coordination with the United States Mint. The creation of the structure was by the Federal Reserve Act, and President Woodrow Wilson, on the 23rd of December, 1913, signed it into law. The Federal Reserve System is the most influential solitary actor in the economy of the United States and the world, and indeed, others consider it as the secret society that manages the globe’s funds due to its complex nature.[1] Nevertheless, they are right as the central banks are responsible for the management of the funds’ supply all around the world even though there is no secret behind the scheme.

The Structure of the Federal Reserve System

            The Federal Reserve System has a two-portion organization, the central authority known as the Board of Governors located in Washington, D.C., and the distributed set-up of twelve Federal Reserve Banks situated all through the nation. The setting of the monetary policy is by the federal open market committee which comprises the Board of Governors’ members and the Reserve Banks’ presidents.[2]

The Board of Governors

            The location of the Board of Governors of the Federal Reserve System is in Washing, D.C., and offers the direction for the System. The Board of Governors, also called the Federal Reserve Board is the nationwide constituent of the Federal Reserve System and comprises of the seven councils whose appointments are by the president and confirmation by the Senate. The Governors serve for a spread out fourteen-year periods to guarantee solidity and permanence over time.[3] On the other hand; the appointments of the chairman and the vice-chairman are to the terms of four years and may undergo the reappointments subject to the period limits. Some of the duties of the Board of Governors are to channel the financial plan action, to analyze the internal and worldwide economic and fiscal situations, and to pilot the agencies that study the up to date concerns, such as the consumer depository regulations and the electronic business.

            Moreover, the Board of Governors also performs the expansive administrative control over the production of the commercial services, oversees specific rules as regards the consumer fortification, and administers the expenditures scheme of the nation. The Board also has the role of managing the Reserve Banks’ activities even to the extent of endorsing the selections of individual associates of the board of administrators and their presidents. The setting of the reserve necessities for the depository organizations and approval of changes in the discounts rates advocated by the Reserve Banks is also another significant duty of the Board.

When it comes to the Federal Open Market Committee which has the obligation of conducting the country’s monetary policy, the Board’s primary significant responsibility is to take part by forming the voting majority of FOMC, that is, seven governors. The remaining five votes usually come from the presidents of the Reserve Bank. The members of the Board always keep regular contact with the other institutions of the government and are often as well presented to give evidence before the Congress. The chairman reports two times annually to the Congress on the objectives of the Fed’s financial strategy, testifying on the various other concerns, and meeting occasionally with the Secretary of the Treasury. The Board finances its processes through the assessment of the Federal Reserve Banks instead of by the Congressional embezzlement and audits its financial records yearly by the public accounting organization, and such reports are also dependent on inspection by the General Accounting Office.[4]

Federal Reserve Banks

In the universal administration of the Board of Governors, the Federal Reserve System has a composition of a network of twelve Federal Reserve Banks which are the working bodies of the central depository and twenty-four branches. Every one of the twelve Reserve Banks serves a specific area of the nation, and all exclusive of three possess other headquarters in their Districts to assist in the provision of services to the banking organizations and the public. The naming of the Federal Reserve Banks is after their headquarters’ localities, for instance, there are Kansas City, Boston, Cleveland, St Louis, San Francisco, New York, Richmond, Chicago, Dallas, Atlanta, Minneapolis, and Philadelphia.

The Reserve Banks are responsible for serving the United States Treasury, other banks, and the public in some way. Indeed, the Reserve Bank has another name, the banker’s bank, given that its stores money, and also deals with the checks and electronic disbursements. Besides, the Reserve Banks also have the task of supervising the commercial banks in their respective locations. As the United States’ government bank, the Federal Reserve Banks manage the payments of the Treasury, trade the securities of the Federal government, and also offer assistance with the money supervision and investment actions of the Treasury. They also research the global, nationalized, and local economic matters. The investigation usually plays a significant function in conveying the tremendous financial perceptions to the national strategy making dome and sustains the Reserve Bank presidents who all are always in attendance to the conventions of the Federal Open Market Committee.

The board of directors of each Reserve Bank has the obligation of overseeing the administration and activities of the District bank and through the reflection of the different dividends of every District, the executives provide the locality commerce knowledge, neighborhood attachment, and guidance. The board influences the private-division standpoint to the Reserve Bank, and each one is responsible for the appointment of the president and the first deputy president of the Reserve Bank, and that is dependent on the Board of Governors’ authorization. All the associate depositories hold stock in the Reserve Banks and obtain shares; however, in contrast to the stockholders in the public corporation, the banks are not in a position to sell or deal their Fed stock. The Reserve Banks also interrelate directly with the banks within their Districts by inspections and economic services thus bringing the critical regional perspectives that assist the entire Federal Reserve System to perform its task more efficiently.[5]  

Federal Open Market Committee

The Federal Open Market Committee (FOMC) is the economic policycrafting agency of Fed and has twelve voting members who are inclusive of the seven associates of the Board of Governors and the revolving faction of five presidents of the Reserve Bank. The FOMC is accountable for the formulation of the plan premeditated for the promotion of steady costs and economic development, or in other words, it is responsible for the management of the country’s financial supply. The FOMC’s voting members are the Board of Governors, the New York’s Federal Reserve Bank president, and four of the other Reserve Banks’ presidents who act on the rotational basis. All the Reserve Bank presidents take part in the policy negotiations of FOMC but under the leadership of the chairman of the Board of Governors.[6] The FOMC normally assembles eight times annually in Washington, D.C., and in each conference, the commission confers the U.S economy’s viewpoint and the financial policy preferences.

Financial Regulatory Reform

The Dodd-Franc Act which was lately enacted has various provisions that impact the structure of Fed. The legislation inserts a second vice chairman spot in the Board of Governors to administer the management and guideline accountabilities of Fed. Moreover, the act amends the process for appointing the twelve Reserve Banks’ president through the exclusion of the commercial banks’ director representatives from the selection procedure. The measures are to augment the transparency and answerability of Fed devoid of jeopardizing its sovereignty.

The Independence of the Federal Reserve System

The Federal Reserve System is independent in that its formulation is in such a way that it ensures the insulation of the monetary policy from any political pressure. The system is under protection from the other arms of the federal government’s interference, and, indeed, its plan and operational resolutions do not necessitate the approval of the President or the Congress thus making it more independent.[7]

Besides, the Federal Reserve System finances its operations through its resources instead of through the congressional appropriations even if the Congress has authority to alter the Fed’s governing laws hence its independence.[8]

The Tools of the Fed

Reserve Requirements

One of the primary apparatus of the Fed is the reserve requirements and is the number of funds that the banking organization has to hold in store against the specific deposit accountabilities. Within the law limits specifications, the Board of Governors has the exclusive power over the alterations in the reserve requirements. Also, the depository bodies must maintain reserves through vault money or deposits with the Federal Reserve Banks. The determination of the dollar sum of the banking agency’s reserve requirement is through the application of reserve ratios defined in the Federal Reserve Board’s Regulation D to the organization’s reservable responsibilities. The reservable charges comprises of the Eurocurrency liabilities, net transaction accounts, and the nonpersonal time deposits, however, there has been zero reserve ratios of the Eurocurrency liabilities and nonpersonal time deposits ever since the 27th of December, 1999.[9]

Open Market Operations

The open markets operations are the central bank’s trade of securities in the open market, and the tools are useful when it comes to the monetary policy implementation by the Federal Reserve. There has been the considerable evolution of the approach of the Federal Reserve to the execution of the monetary procedure since the fiscal disaster, particularly since late 2008 during the FOMC’s establishment of the near-zero mark range for the federal funds rate.  As of late 2008 to the October of 2014, the Federal Reserve significantly extended its longer-period securities’ assets through open market acquisitions. That was with the aim of placing downward pressure on the longer-period interest tariffs and hence sustaining the economic action and employment establishment through making the financial environments extra accommodative. In the process of guidelines normalization that instigated in 2015 December, the Federal Reserve will utilize the overnight reverse repurchase agreements (ON RRPs) which is a brand of OMO, as a complementary strategy contrivance for the management of the federal funds rate.[10] 

The Discount Rate

The discount rate is also another tool of Fed and is the interest rate charged to the commercial depositories and other banking organizations on their received loans from their local crediting provision of the Federal Reserve Bank, the discount window. The Federal Reserve Banks usually provide three discount window agendas to the depository organizations: seasonal, primary, and secondary credit, and each one with a unique interest rate and all the discount window credits wholly protected. In the primary credit plan, the extensions of the loans are for a short period, typically overnight, to the banking firms in the excellent financial state. The ineligible depository organizations to the primary credit can always go for the secondary to manage the interim liquidity demands.  The seasonal credit is for the comparatively little banking institutions that possess the persistent intra-annual variations in the funding requirements, for instance, the banks within the agricultural communities.

The setting of the primary credit’s discount rate is often above the standard level of the overnight interest rates. When it comes to the secondary credit, the discount rate is always above the price on the primary loan, and that for the seasonal credit is an average of the preferred market tariffs. Each Reserve Bank’s board of managers establishes the discount rates subject to the evaluation and determination of the Federal Reserve System’s Board of Governors. However, the three lending agenda’s discount rates are similar in every Reserve Bank with the exception on the days when there is an alteration in the price.[11]   

Bibliography

Blystone, Dan. Why is the Federal Reserve Independent? Investopedia. Last modified April 15, 2015. Accessed April 17, 2018. https://www.investopedia.com/articles/investing/041515/why-federal-reserve-independent.asp.

Board of Governors of the Federal Reserve System. The Fed - Policy Tools. Board of Governors of the Federal Reserve System. Last modified February 21, 2017. Accessed April 17, 2018. https://www.federalreserve.gov/monetarypolicy/policytools.htm.

Clifford, Jerome A. The Independence of the Federal Reserve System. Home | University of Pennsylvania. Last modified 2015. Accessed April 17, 2018, http://www.upenn.edu/pennpress/book/388.html.

The Editors of Encyclopedia Britannica. Federal Reserve System | Definition, Functions, & Facts. Encyclopedia Britannica. Last modified February 22, 2018. Accessed April 17, 2018. https://www.britannica.com/topic/Federal-Reserve-System.

Federal Reserve Bank of San Francisco. What is the Fed: Structure? Federal Reserve Bank of San Francisco. Last modified November 7, 2012. Accessed April 17, 2018. https://www.frbsf.org/education/teacher-resources/what-is-the-fed/structure/.

Federal Reserve.Gov. The Structure and Functions of the Federal Reserve System. Federal Reserve Education.org. Accessed April 17, 2018. https://www.federalreserveeducation.org/about-the-fed/structure-and-functions.

1. The Editors of Encyclopedia Britannica, Federal Reserve System | Definition, Functions, & Facts, Encyclopedia Britannica, last modified February 22, 2018, https://www.britannica.com/topic/Federal-Reserve-System. p-1

2. Federal Reserve Bank of San Francisco, “What is the Fed: Structure,” Federal Reserve Bank of San Francisco, last modified November 7, 2012, https://www.frbsf.org/education/teacher-resources/what-is-the-fed/structure/. P-1

3. Federal Reserve.Gov, The Structure and Functions of the Federal Reserve System, Federal Reserve Education.org, accessed April 17, 2018, https://www.federalreserveeducation.org/about-the-fed/structure-and-functions. p-3

4. Federal Reserve.Gov, The Structure and Functions of the Federal Reserve System, Federal Reserve Education.org, accessed April 17, 2018, https://www.federalreserveeducation.org/about-the-fed/structure-and-functions. p-8

5. Federal Reserve Bank of San Francisco, What is the Fed: Structure, Federal Reserve Bank of San Francisco, last modified November 7, 2012, https://www.frbsf.org/education/teacher-resources/what-is-the-fed/structure/. P-4

6. Federal Reserve.Gov, The Structure and Functions of the Federal Reserve System, Federal Reserve Education.org, accessed April 17, 2018, https://www.federalreserveeducation.org/about-the-fed/structure-and-functions. p-16

7. Dan Blystone, Why is the Federal Reserve Independent? Investopedia, last modified April 15, 2015, https://www.investopedia.com/articles/investing/041515/why-federal-reserve-independent.asp. p-2

8. Jerome A. Clifford, The Independence of the Federal Reserve System, Home | University of Pennsylvania, last modified 2015, http://www.upenn.edu/pennpress/book/388.html. p-3

9. Board of Governors of the Federal Reserve System, The Fed - Policy Tools, Board of Governors of the Federal Reserve System, last modified February 21, 2017, https://www.federalreserve.gov/monetarypolicy/policytools.htm. p-4

10. Ibid p-2

11. Board of Governors of the Federal Reserve System, The Fed - Policy Tools, Board of Governors of the Federal Reserve System, last modified February 21, 2017, https://www.federalreserve.gov/monetarypolicy/policytools.htm. p-3