The Federal Reserve System is the central bank of the United States, consisting of 12 regional Federal Reserve Banks overseen by a Board of Governors. It was established in 1913 to conduct monetary policy and regulate banking. The Federal Reserve pursues goals of maximum employment, stable prices, and moderate long-term interest rates through tools like open market operations and interest rate targets. It aims to maintain independence from political pressure to ensure decisions are made in the best economic interests of the country.

1. Learning Unit #20
Federal Reserve System

2. Objectives of Learning Unit
 Structure of Federal Reserve System
 Functions of Federal Reserve System
 Independence of Federal Reserve System
 Balance sheet of Federal Reserve System
 Two Monetary Operations

3. Functions of Central Bank
 Each country has one central bank which is
responsible for
– Conducting monetary policy.
– Regulating an amount of money supply in economy.
– Supervising banks.
 In addition, a central bank may
– Regulate financial markets and financial institutions
other than banks.
– Control foreign exchanges and foreign reserves.
– Act as the government’s bank.
– Advising the government on the economic policy.

4. Federal Reserve System
 In the United States, the federal reserve system
(the Fed) acts as the central bank.
 In most developed countries there is only one
central bank. However, in the U.S. the Fed is
divided into various organizational components
for check and balance.
– The federal government have attempted to establish
a single central bank twice, but due to fear of
concentration of economic and monetary power, the
Congress abolished such institutions.
– In 1931 the Congress established the twelve regional
Federal Reserve banks.

5. Mission of Federal Reserve System
The Federal Reserve System is the central bank of the United
States. It was founded by Congress in 1913 to provide the nation
with a safer, more flexible, and more stable monetary and financial
system. Over the years, its role in banking and the economy has
expanded. Today, the Federal Reserve's duties fall into four
general areas:
– conducting the nation's monetary policy by influencing the
monetary and credit conditions in the economy in pursuit of
maximum employment, stable prices, and moderate long-term
interest rates
– supervising and regulating banking institutions to ensure the
safety and soundness of the nation's banking and financial
system and to protect the credit rights of consumers
– maintaining the stability of the financial system and containing
systemic risk that may arise in financial markets
– providing financial services to depository institutions, the U.S.
government, and foreign official institutions, including playing
a major role in operating the nation's payments system
From http://www.federalreserve.gov/aboutthefed/mission.htm

6. Functions of Federal Reserve System
Like any other central banks, the Federal Reserve
System performs various important functions
through its organizational components.
 Provide financial services to banks
– Clear checks
 Act as government’s bank
– Print new currencies and withdraw old ones
– Maintain government accounts
 Regulate banking and financial industries
 Conduct monetary policy

7. Organizational Components of the
Federal Reserve System
Three main organizational components of
the Federal Reserve System:
 Regional Federal Reserve banks
 Board of Governors
 Federal Open Market Committee

8. Regional Federal Reserve Banks
 The U.S. is divided into twelve Federal
Reserve districts.
– Each district has one Federal Reserve bank.
• Ex. Federal Reserve Bank of Richmond covers
states of Maryland, Virginia, North Carolina, and
South Carolina.
– By dividing into twelve districts, no one
Federal Reserve bank can dominate in the
U.S. economy.
• Federal Reserve Bank of New York covers only
the state of New York, but holds one-quarter of the
assets of the Federal Reserve System.

9. Twelve Federal Reserve Banks
Federal Reserve districts vary in geographical economic
size and sometime cut through states.

10. Organization of Federal Reserve Banks
 Each Federal Reserve Bank has the same
organizational structure.
– A quasi-public institution, which issued stocks
and were owned by the member commercial
banks in the district.
– Nine directors: six elected by the member
banks and three appointed by the Board of
Governors.
– One president of the bank is appointed by the
nine directors.

11. Functions of Federal Reserve Banks
 Federal Reserve banks perform
– Clearing checks
– Issuing new currency and withdrawing damaged
currency
– Setting a discount rate and making discount loans to
banks in their districts
– Examining bank holding companies and state-chartered
member banks
– Acting as liaisons between the business community
and the Federal Reserve System
– Collecting data on local business conditions
– Researching for the conduct of monetary policy

12. U.S. Dollar Bills
 U.S. dollar bills are issued by the Federal
Reserve banks.
Emblem of the
Federal Reserve
System
“Federal Reserve Note”
means IOU (note
payable) issued by the
Federal Reserve System.
Federal Reserve Bank
of San Francisco
issued this note.

13. Member banks
 All national banks are required to be members of
the Federal Reserve System.
– Currently, about 37% of the commercial banks are
members of the Federal Reserve System.
 Depository Institutions Deregulation and
Monetary Control Act of 1980
– Requires all depository institutions (member and
nonmember banks) to hold required reserves.
– Makes check-clearing services and the discount
window available for all depository institutions.

14. Board of Governors
 The Board of Governors acts like the
headquarter of the Federal Reserve
System.
– Located in Washington, D.C.
– Seven members of the Board of Governors are
appointed by the president of the United States
and confirmed by the Senate.
– Each member serves for nonrenewable 14-
year term and comes from different districts.
• Why 14-year term? To avoid political pressure from
the President and the Congress.
• Why from different districts? To prevent one district
over-representing its interest over other districts.

15. Chairman of Board of Governors
 The chairman of the Board of Governors is
chosen from the seven governors.
– Serves for renewable
four-year term.
– Acts like the CEO of
the Federal Reserve
System.
– Jerome Powell is the
current chairman.

16. Functions of Board of Governors
 The Board of Governors
– Sets the reserve requirement
– Approves the discount rate requested by the Federal
Reserve banks
– Advise the president of the United States, testifies in
Congress, and speaks for the Federal Reserve System for
the media.
– Represents the United States in negotiations with foreign
governments on economic matters
– Provides economic analysis for the conduct of monetary
policy
– Sets margin requirements
– Approves bank mergers and applications for new activities
and specifies the permissible activities of bank holding
companies
– Supervise the activities of foreign banks in the U.S.

17. Federal Open Market Committee
 The Federal Open Market Committee
– Meets eight times a year
– Makes decisions regarding the conduct of open
market operations, including setting a target rate on
federal funds
– Consists of twelve members: the seven members of
the Board of Governors, the president of the Federal
Reserve Bank of New York, and the presidents of four
other Federal Reserve banks.
– Directed by the chairman of the Board of Governors

18. Monetary Policy and FOMC
 The Federal Open Market Committee (FOMC) is
the major body of monetary policy decision-
making at the Federal Reserve.
– Twelve members of FOMC vote for or against the
proposed monetary policy.
– The chairman of the Fed, acting as the chairman of
the FOMC, announces in public about the decision.
– “Tightening of monetary policy” (lowering money
supply growth – “hawkish policy”) is accompanied by
a rise in the federal funds rate, while “easing of
monetary policy” (increasing money supply growth –
“dovish policy”) is done by lowering the federal funds
rate.

19. Organizational Structure of the Fed
Three main
organizational
components of
the Federal
Reserve System
and their
responsibilities
for monetary
policy tools.

20. Relations among Organizational
Components of the Fed
Although the
Federal Reserve
System was set
up to diffuse its
power among its
organizational
components, over
time it evolved to
be more
centralized around
the chairman of
the Board of
Governors.

21. Independence of the Fed
The Federal Reserve System must be free
from any government direction or pressure
when it conducts monetary policy.
– Instrumental independence: the ability to set
monetary instruments
• Can the Fed change freely its instruments of
monetary policy?
– Goal independence: the ability to set the goals
of monetary policy
• Can the Fed set own goals of monetary policy? Can
the federal government set or influence the goals?

22. Why Independence of the Fed
Important?
The Federal Reserve System needs to be
independent from the federal government.
– The government should not influence the Fed’s decision
to maintaining stable financial system.
• Should the federal government make the Federal Reserve to
rescue a particular financial institution (e.g. Bear Stern,
Fannie Mae)?
– The government should not use the Fed as source of
free spending.
• Politicians do not like to raise taxes or cut expenditures to
balance the government budget, because such unpopular
policy may affect their election. Should they ask the Fed to
print more money or borrow free loans from the Fed, so the
government can spend more without raising taxes?

23. Consequence of Not-Independent
Central Bank
 Each country maintains different degree of
independence of its central bank from the
government.
– When a central bank has
very limited independence
from its government, the
government tends to make
the central bank issue
more money and the
economy tends to
experience high inflation.

24. Why not Independence of the Fed?
The Federal Reserve System should not be
completely independent from the federal
government.
– Because the officials at the Federal Reserve
System are not elected by the people of the
U.S., the federal government must make sure
that they do not act for their own gain or against
the welfare of the economy.
– The economic policy needs to be coordinated
between the federal government (fiscal policy)
and the Fed (monetary policy) to be effective.

25. Independence of the Fed: Reality
 The Federal Reserve System maintains its
independence from the federal government.
– The Board of Governors serves for 14 years, making
it free from influence of current president and
Congress.
– Its budget is not subject to the appropriation process.
 But, its independence is not complete.
– The chairman of the Board of Governors must testify
at the Congress twice a year, so the Congress can
keep eyes on the Fed.
– The Congress has power to change the structure of
the Fed if necessary.
– The president of the U.S. can appoint new chairman
every four years.

26. Instrumental and Goal Independence of
the Federal Reserve System
 The Federal Reserve System is not completely
independent from the federal government.
– Instrumental independence: The Federal Reserve
System can set freely its monetary instruments (e.g.
target rate of federal funds, discount rate). However,
the Congress sets what instruments available for the
Fed (e.g. the Fed’s ability on interest rate ceiling and
margin requirement is authorized by the legislation).
– Goal independence: The Congress established the
Federal Reserve System with mandate goals (e.g.
employment and price stability). However, there is
great degree of freedom on how and what the Fed is
going to achieve (e.g. the Fed can set own goal such
as target unemployment rate or inflation rate).

27. Disclaimer
Please do not copy, modify, or distribute this presentation
without author’s consent.
This presentation was created and owned by
Dr. Ryoichi Sakano
North Carolina A&T State University