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Economic Policies of The Federal Reserve
1. Economic Policies of The Federal Reserve
The Federal Reserve System (The Fed) is an integral part of the nation's payment system. The
Federal Reserve System is ruled by a six member board of governors and a Chairman of the Board.
The 12 Federal Reserve Banks provide enough coins and notes in circulation for demand of the
public to be met. In addition the Banks provide banking options for the federal government, provide
check cashing services to banks and other financial institutions, and operate electronic payment
systems.
The Federal Reserve System is ruled by a six member Board of Governors and a seventh appointed
Chairman of the Fed. The Chairman of the Fed is actually one of the Board of Governors that is
appointed as the Chairman by the President of The United States once every four years. The
appointment by the President is then confirmed by the Senate. The other members of the Board of
Governors serve 14 year terms. It is possible for a governor to serve more than the 14 years if they
are appointed to finish off another Governor's term and then get appointed to their own term. The
Presidents of the 12 Regional Federal Reserve Banks are appointed by the Regional Bank's Board of
Directors.
One of the main responsibilities of The Fed is to keep enough coins and currency available to meet
public demand. When there is a bigger demand for money, such as the holiday season, the Fed will
send an order for notes to the U.S. Bureau of Engraving and Printing in Washington, D.C., and Fort
Worth, Texas. When ordering additional coin the order is sent to U.S. Mints in Philadelphia and
Denver. These notes and coins are then drawn from one of the 12 Federal Reserve Banks by member
banks against their Federal Reserve account balance. When a member bank has an excess of notes
and coins they return the monies to the Federal Reserve Bank so that the balance increases. One of
the primary jobs of the Fed Res Bank is to take worn out notes out of circulation and replace with
new ones.
The Fed also provides check collection services to member banks. Nearly 1/3 of all paper that is
considered a check is processed through The Fed. Some member banks have agreements with each
other in place that allow them to clear checks with each other without involving The Fed. As a
2. general trend, writing of paper checks has been steadily declining since the 1990s. Instead most
consumers are using electronic payment methods. Since 2004 banks have been taking images of
checks and having The Fed process those images. This is a practice that The Fed has actively
encouraged and today 99% of all checks are processed as images. There is only one site that remains
in the US that still processes paper checks, located Cleveland, Ohio. This is down from the 45 sites
that processed paper checks in 2003.
The important thing to remember though is that even though the volume of paper checks has been
declining for The Fed, the volume of electronic checks has been steadily increasing. For smaller
institutions The Fed has established an Automated Clearinghouse (ACH) that allows them to clear
debit and credit transactions. The Fed processes 75% of all of the nation's ACH payments, which
include mortgage payments, utilities, one time payments over the internet, social security payments,
direct deposit payroll payments, etc. For large transactions The Fed maintains the Fedwire that
allows instantaneous transfers of payments from one financial institution to another. These include
securities that are issued by the Federal Government, government sponsored enterprises, other
government agencies, and certain international organizations.
The most important role of The Fed is to act as the main banker for the Federal Government. They
maintain the Treasury Department's Checking account and clear Treasury Department checks. All
US Treasury Securities are issued, transferred and redeemed by a Federal Reserve Bank. Auctions
for US Treasury Securities and processing of US Savings Bonds are done exclusively by a Federal
Reserve Bank. In addition The Fed is responsible for Government payouts such as Social Security
and payroll checks.
The importance of the Federal Reserve System to the Economy of the United States, and thereby the
economy of the world, is immeasurable. The main overseeing entity for The Fed is the seven-member
Board of Governors, one of whom is appointed as the Chairman of the Fed. The Fed is responsible
for providing enough currency, in the form of coins and notes, to satisfy the demand of the economy.
The Fed ensures that all financial institutions can collect on checks and other electronic payments.
The Federal Government uses The Fed as its primary banker, especially the issuing and processing
of US Treasury Securities.