16.2 The Federal Reserve System

16.2 a. The Fed’s Organization

A nation’s money supply is determined by the monetary policy actions of its central bank. The Federal Reserve is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. It is a federal system, composed of a central, independent governmental agency–the Board of Governors–in Washington, D.C., and 12 regional Federal Reserve Banks, located in major cities throughout the nation. The Fed’s responsibilities fall into four general areas [5]:

• Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
• Supervising and regulating banks and other important financial 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 certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation’s payments systems.

Example: In 1991, the Right to Truth in Savings Act empowered the Fed to require that banks disclose account information to consumers, including the annual percentage yield; regulated advertising of savings accounts; and prohibited certain methods of calculating interest [6].

https://youtu.be/0lN2EBBpKJE

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16.2 b. The Federal Open Market Committee

The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members–the seven members of the Board of Governors and five of the 12 Reserve Bank presidents. The Board chair serves as the Chair of the FOMC; the president of the Federal Reserve Bank of New York is a permanent member of the Committee and serves as the Vice Chairman of the Committee. The presidents of the other Reserve Banks fill the remaining four voting positions on the FOMC on a rotating basis [5].

The Federal Reserve conducts monetary policy to achieve its macroeconomic objectives of maximum employment and stable prices. Usually, the FOMC conducts policy by adjusting the level of short-term interest rates in response to changes in the economic outlook. Since 2008, the FOMC has also used large-scale purchases of Treasury securities and securities that were issued or guaranteed by federal agencies as a policy tool in an effort to lower longer-term interest rates and thereby improve financial conditions and so support the economic recovery [5].

Example: To tighten the money supply in order to decrease the amount of money available in the banking system, the FOMC is in charge of selling government securities [8].

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