The Federal Reserve, who, what, when, why?

THE FEDERAL RESERVE

Part One

With the current economic crisis still in full swing, people are beginning to sit up and notice some things that fell under peoples radar unless they were in the financial services industry. I am of course speaking of the federal reserve, or the fed, and the Federal Open Market Committee, or the FOMC as most people know it by.

In this series we are going to learn about the ways the federal reserve, and the reserves chairman, and how they work to keep our economy on track. Many of us do not remember Paul Volcker, but he is widely credited with stopping the US stagflation of the seventies. Most have heard of Alan Greenspan, or just Greenspan and his cheap money. However he has often been criticized for waiting too late to act on a number of occasions.

Some questions that will be answered in this series is what is the fed, what is the purpose of the fed, and what tools do they have to effect the economy?

The federal reserve was created in response to several economic crises, financial panics and bank runs, particularly the one in 1907. The fed underwent a complete overhaul in response to the great depression. The Federal Reserve is an independent institution that is accountable to Congress. The constitution gives Congress the power to coin money and set its value. Congress delegated this power to the Federal Reserve in the 1913 Federal Reserve Act, but still maintains oversight authority.

Under the Humphrey-Hawkins Act of 1978 the Federal Reserve must submit a report on the economy on February 20^th and July 20^th of each year. The chairman of the Federal Reserve is called upon to testify before the Senate and House Committees.

The Federal Reserve System is made up of a board of Governors and twelve regional Federal Reserve Banks located in major cities throughout the country. One good indicator of the Feds likely actions lies in the 'beige book' that is released two weeks before each meeting. The beige book details the economic conditions throughout the country.

The duties of the Federal Reserve as documented by their own documents, are as follows:

1. Conducting the nations monetary policy by influencing the monetary and credit conditions in the economy.

2. Supervising and regulating banking institutions to ensure safety and soundness

3. Maintaining the stability of the financial systems and containing systemic risks that may arise in financial markets.

4. Providing financial services to depository institutions the US government, foreign official institutions, including playing a major role in operating the nations payment systems.

The Federal Reserve is in part a government enterprise and a private enterprise, and is made up of five different parts.

1. A presidentially appointed board of governors

2. The Federal Open Market Committee (FOMC) which oversees open market operations, the principle tool of national monetary policy

3. Numerous other private US member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks

4. Various advisory councils

So there you have a bit of history of the Federal Reserve and what it is comprised of. In the next article you will find the tools that the Fed uses to control monetary policy.

Happy Reading