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Banking system
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FEDERAL RESERVE BANK The Federal Reserve, the Central Bank of the United States, was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve System is divided into 12 districts, collectively serving as the nation’s Central Bank. The Federal Reserve is considered to be an independent central bank. It is so only in the sense that its decisions do not have to be ratified by the President or anyone else in the executive branch of government. The entire system is subject to oversight by the U.S. Congress because the Constitution gives to Congress the power to coin money and set its value, a power that in the 1913 act, Congress itself delegated to the Federal Reserve. The Federal Reserve must work within the framework of the overall objectives of economic financial policy established by the government, and thus the description of the system as “independent within the government.” Today, the Federal Reserves’ duties fall into four categories: 1. Conducting the nation’s monetary policy 2. Supervising and regulating banking institutions and protecting the credit rights of consumers. 3. Maintaining the stability of the financial system 4. Providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions. Monetary Policy The Federal Reserve System conducts monetary policy using 3 major tools: 1. Open Market Operations- the buying and selling of U.S. government (mainly Treasury) Securities in the open market to influence the level of reserves in the depository system. 2. Reserve Requirements- requirements regarding the amount of funds commercial banks and other depository institutions must hold in reserve against deposits. 3. The Discount Rate- the interest rate charged commercial banks and other depository institutions when they borrow reserves from a regional Federal Reserve Bank. The Federal Reserve Act lays out the goals of monetary policy. It specifies that in conducting monetary policy, the Federal Reserve System and the Federal Open Market committee should seek “to promote effectively the goals of maximum employment, stabilize prices, and moderate long-term interest rates.” Many analysts believe that the central bank should focus primarily on achieving price stability. A stable level of prices appears to be the condition most conducive to maximum sustained output and employment and to moderate long-term interest rates. Experience has shown that the economy performs well when inflation is low.
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