Business, Legal & Accounting Glossary
The central banking system of the U.S., comprised of the Federal Reserve Board, the 12 Federal Reserve Banks, the Federal Open Market Committee, and the national and state member banks. Its primary purpose is to regulate the flow of money and credit in the country. The Federal Reserve was established in 1913 to maintain a sound and stable banking system throughout the United States and to promote a strong economy, although there has been a Central Bank in place on and off since 1791. The Board of Governors is made up of 7 members that are appointed to 14-year terms by the President and approved by the Senate.
Almost all U.S. banks are a part of the Federal Reserve System, which requires that those banks maintain a certain percentage of their assets deposited with the regional Federal Reserve Bank. These “reserve requirements” are set by the Board of Governors and by changing the requirements, the Federal Reserve System can greatly impact the amount of money supply in the economy. The Federal Reserve System has several functions. First, it serves as a bank for banks: many transactions between banks are processed through the Federal Reserve System. Financial institutions are also able to borrow money through the Federal Reserve, but only after attempting to find credit elsewhere; the Federal Reserve System provides credit only when it cannot be found in the markets or in cases of emergency. Second, the Federal Reserve System acts as the government’s bank. The tax system processes incoming and outgoing payments through a Federal Reserve checking account. The Federal Reserve also buys and sells government securities. The Fed even issues the U.S. currency, although the actual production of the currency is handled elsewhere. Third, the Federal Reserve System acts as a regulatory agency. The Fed polices the banking industry to make sure that things run smoothly and that the rights of consumers are protected. Furthermore, the Federal Reserve System is meant to be a primary resource during a banking panic or financial crisis.
The Fed, also known as the Federal Reserve System is the central bank of the US.
The Federal Reserve Act was signed on December 23, 1913, by US President Wilson. The Chairman is Ben Bernanke. The Federal Reserve System is comprised of twelve Federal Reserve Banks. Each of these banks represents its own district. They are all overseen by the Board of Governors of the Federal Reserve System.
According to the Fed’s website, “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.”
The Federal Reserve is subject to oversight by Congress but is an independent central bank which means its actions do not have to be ratified by the president. It is often described as “independent within the government”.
Contrary to popular belief, the Fed does not simply change interest rates at will. It sets target rates and attempts to move the market towards those rates by the sale or purchase of public debt (bonds).
Lower interest rates result in banks having easier access to money (cheaper) and therefore increase liquidity in the economy. Higher interest rates reduce funds in the economy.
In regulating output and price level (employment and inflation), the Fed must move the aggregate supply and aggregate demand curves to meet those goals.
In the United States, the Federal Reserve System was established in 1913 by the Federal Reserve Act. The primary basis for conceiving the Federal Reserve System was the mounting need to effectively regulate the U.S. monetary and banking system. The Federal Reserve System comprises twelve regional Federal Reserve Banks, as well as their twenty-four sub-branches. The headquarters of the Federal Reserve System is located in Washington D.C. National and state banks are also part of the Federal Reserve System. Today, the Federal Reserve System is at the core of the nation’s monetary and regulatory activity. The Federal Reserve System regulates the money supply, sets reserve requirements for member banks, and supervises the printing of currency at the mint. In addition to acting as a clearinghouse to transfer funds through the banking structure, the Federal Reserve System also provides many financial and research services to the U.S. government.
The Fed controls the nominal money supply through:
This is the amount of backup funds a bank must keep at the central bank. It is usually at about 11-12% but some responsible banks keep a bit more for security.
This is the borrowing window for inter-bank overnight loans for banks only.
The Federal Open Market Committee (FOMC) is what the Fed is most known for, as this group sets the monetary targets and oversees open market operations.
It is comprised of the following:
The Fed plays a very delicate game and is subject to many pitfalls. The Fed can easily make mistakes. Following are some of the hazards it faces:
Crowding out occurs when the government seeks to induce growth via monetary expansion policies. In such an event, excessive federal spending can compete with private investment, resulting in a reduction of aggregate demand.
Inflation or a sustained increase in price levels (not a one-time increase) can result from the Fed’s actions. Increased money supply can create inflation. If the Treasury prints too much money, inflation will occur as well.
Deflation is the sustained drop in price levels. This is even more difficult to control than inflation because the Fed may lower interest rates to stimulate demand. However, once interest rates hit zero, as happened in Japan in the 90s, this open market tool of monetary policy is gone. Other things that can be done to revive the economy are to print money (very dangerous) or to give money to banks. Also, the Fed could rely on the supply side by cutting corporate taxes, reducing inefficient regulations, and increasing depreciation allowances.
When my bank wanted to make more loans to businesses in the area, we weren’t able to do so because the Federal Reserve System had decided to lower the amount of money in the country and was refusing to lend us any money.
Board of Governors
rediscount rate
bank panic of 1907
New York Clearing House Association
Federal Reserve requirement
clearinghouse funds
Federal Open Market Committee
Primary Dealer
nonmember bank
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Federal Reserve System are sourced/syndicated and enhanced from:
This glossary post was last updated: 22nd November, 2021 | 0 Views.