The Federal Reserve System (also known as Federal Reserve or just the Fed ) is the central banking system of the United States. It was made on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panic (especially the panic of 1907) caused a desire for central control of the monetary system to ease the financial crisis. Over the years, events such as the Great Depression of the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.
The US Congress sets out three major goals for monetary policy within the Federal Reserve Act: maximizing employment, stabilizing prices, and moderating long-term interest rates. The first two goals are sometimes referred to as the Federal Reserve's dual mandate. His job has grown over the years, and now also includes overseeing and managing banks, maintaining financial system stability, and providing financial services to depository institutions, US government and foreign official institutions. The Fed conducts research into the economy and provides many publications, such as the Beige Book and FRED databases.
The Federal Reserve system consists of several layers. This is governed by the Board of Governors appointed by the president or the Federal Reserve Board (FRB). Twelve regional Federal Reserve Banks, located in cities across the country, organize and oversee private-owned commercial banks. Commercial banks that are hired nationally are required to keep their shares, and may elect some board members of the Federal Reserve Bank in their territory. The Federal Open Market Committee (FOMC) establishes monetary policy. It is composed of all seven members of the Board of Governors and twelve regional Federal Reserve Bank presidents, although only five bank presidents vote at one time (the Fed president of New York and four others who rotate through a one-year voting period). There are also various advisory boards. Thus, the Federal Reserve System has a public and private component. It has a unique structure among central banks, and is also unusual in the US Treasury, an entity outside the central bank, printing the currency used.
The federal government sets the salaries of seven governor councils. The federal government receives all the system's annual profits, after a mandatory dividend of 6% on paid member bank capital investments, and an account surplus maintained. In 2015, the Federal Reserve made a profit of $ 100.2 billion and transferred $ 97.7 billion to the US Treasury. Despite US Government instruments, the Federal Reserve System considers itself an "independent central bank because its monetary policy decisions do not have to be approved by the President or others in the executive branch or governmental legislature, he does not receive funding." adapted by Congress, and the terms of members of the Board of Governors include some presidential and congressional provisions. "
Video Federal Reserve System
Destination
The main motivation for creating the Federal Reserve System is to overcome the panic of banking. Other objectives are stated in the Federal Reserve Act, such as "to provide elastic currency, to buy a rediscounting means of commercial paper, to establish more effective banking supervision in the United States, and for other purposes". Prior to the establishment of the Federal Reserve System, the United States suffered several financial crises. A very severe crisis in 1907 caused Congress to enforce the Federal Reserve Act in 1913. Currently, the Federal Reserve System has the responsibility in addition to ensuring the stability of the financial system.
The current functions of the Federal Reserve System include:
- To resolve the banking panic problem
- Serves as the central bank for the United States
- To achieve a balance between the bank's personal interests and central government responsibilities
- To supervise and manage banking institutions
- To protect consumer credit rights
- To manage the country's money supply through monetary policy to achieve conflicting goals
- maximum work
- stable prices, including inflation prevention or deflation
- moderate long-term interest rate
- To maintain financial system stability and to contain systemic risk in financial markets
- To provide financial services to depositors, US government and foreign official institutions, including playing a leading role in operating the country's payment system
- To facilitate inter-regional payment exchanges
- To respond to local liquidity needs
- To strengthen the US position in the world economy
Troubleshoot bank panics
Banking institutions in the United States are required to keep reserves - the amount of currency and deposits in other banks - equal to only a small fraction of the amount of bank deposit obligations to customers. This practice is called fractional backup banking. As a result, banks usually invest most of the funds received from depositors. On rare occasions, too many bank customers will withdraw their savings and banks will need help from other agencies to continue operating; these are called bank runs. Bank runs can cause many social and economic problems. The Federal Reserve System is designed to prevent or minimize the occurrence of bank runs, and may act as a lender of last resort when the bank runs. Many economists, following Milton Friedman, believe the Federal Reserve improperly refused to lend money to small banks as long as the bank was running 1929.
Check the clearing system
Because some banks refuse to remove checks from certain other banks during times of economic uncertainty, a clearing-check system is made at the Federal Reserve System. This is explained briefly in The Federal Reserve System? -? Goals and Functions as follows:
By creating the Federal Reserve System, Congress intends to eliminate a severe financial crisis that has periodically hit the country, especially the financial panic that occurred in 1907. During that episode, payments were disrupted across the country as many banks and clearinghouses refused a clear examination taken on certain other banks, practices that contribute to the failure of other solvent banks. To address this issue, Congress gave the Federal Reserve System the authority to establish a national clearing-check system. The system, then, is to provide not only the elastic currency? -? That is, a currency that will expand or shrink in amounts as economic conditions are guaranteed? -? But also an efficient and fair check-collection system.
Last lender
In the United States, the Federal Reserve serves as the last lender to institutions that can not get credit elsewhere and that devastation will have serious implications for the economy. It takes over this role from private sector "clearing houses" operating during the Free Banking Era; whether public or private, the availability of liquidity is intended to prevent the bank from running.
Fluctuations
Through the discount window and credit operations, the Reserve Bank provides liquidity to the bank to meet short-term needs stemming from seasonal fluctuations in unexpected deposits or withdrawals. Long-term liquidity may also be provided in exceptional circumstances. The rate of the Fed's bank charges for these loans is called the discount rate (formally the primary credit rate).
By making these loans, the Fed serves as a buffer against unexpected daily fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, reducing pressure on the reserve market and reducing the rate of unexpected interest rate movements. For example, on September 16, 2008, the Federal Reserve Board approved a $ 85 billion loan to prevent the bankruptcy of international insurance giant American International Group (AIG).
Central bank
In its role as the central bank of the United States, the Fed functions as a banker bank and as a government bank. As a banker bank, it helps guarantee the security and efficiency of the payment system. As a government bank or fiscal agent, the Fed processes various financial transactions involving trillions of dollars. Just like someone who might keep an account at a bank, the US Treasury keeps a checking account with the Federal Reserve, through which incoming federal tax payments and outgoing government payments will be handled. As part of this service relationship, the Fed sells and redeems US government securities such as savings and debt bonds, bonds and bonds. It also issues the nation's coins and paper currency. The US Treasury Department, through the Mint Bureau and the Engraving and Printing Bureau, actually generates the national money supply and, essentially, sells paper currency to the Federal Reserve Bank at production costs, and coins at face value. The Federal Reserve Bank then distributes it to other financial institutions in various ways. During Fiscal Year 2013, the Bureau of Engraving and Printing generated 6.6 billion records at an average cost of 5.0 cents per note.
federal funds
The federal funds are the reserve balance (also called Federal Reserve Deposits) which are deposited by private banks in the local Federal Reserve Bank. This balance is a reserve of the names of the Federal Reserve System. The purpose of saving funds at the Federal Reserve Bank is to have mechanisms for private banks to lend to each other. The market for these funds plays an important role in the Federal Reserve System because it is this system that inspires the name of the system and what is used as the basis of monetary policy. Monetary policy is partially implemented by affecting how much interest the private banks charge to lend these funds.
Federal reserve accounts contain federal reserve credits, which can be converted to federal reserve records. Private banks maintain their bank reserves in federal reserve accounts.
Bank regulations
The Federal Reserve regulates private banks. This system is designed from a compromise between privatization philosophy and competing government regulations. In 2006 Donald L. Kohn, vice chairman of the Board of Governors, summarized the history of this compromise:
Agrarian and progressive interests, led by William Jennings Bryan, favored the central bank under the public, rather than bankers, control. But most of the country's bankers, concerned about government intervention in the banking business, oppose the central bank's structure directed by the politically-appointed person.
The law finally approved by Congress in 1913 reflects a struggling struggle to balance these two competing views and create the public-private, centralized-decentralized hybrid structure that we have today.
A balance between private and governmental interests can also be seen in the structure of the system. Private banks elect members of the board of directors in their regional Federal Reserve Bank while members of the Board of Governors are elected by the President of the United States and confirmed by the Senate.
Government regulation and supervision
The Federal Banking Audit Agency Act, passed in 1978 as Public Law 95-320 and 31 U.S.C. Section 714 provides that the Board of Governors of the Federal Reserve System and Federal Reserve banks may be audited by the Government Accountability Office (GAO).
GAO has the authority to audit processing-checking, currency storage and delivery, and some bank regulatory and inspection functions; however, there are limitations to what GAO can audit. Under the Federal Banking Agency Audit Act, 31 U.S.C. section 714 (b), the audit of the Federal Reserve Board and the Federal Reserve bank does not include (1) transactions for or with a foreign central bank or other international or governmental funding organization; (2) consideration, decision, or action in the case of monetary policy; (3) transactions conducted under the direction of the Federal Open Market Committee; or (4) a portion of the discussion or communication between or between members of the Board of Governors and officials and employees of the Federal Reserve System with respect to items (1), (2), or (3). See Federal Reserve System Audit: GAO/GAO/T-GGD-94-44 Access Restrictions, Charles A. Bowsher's statement.
The Board of Governors in the Federal Reserve System has a number of oversight and regulatory responsibilities within the US banking system, but is not entirely responsible. General descriptions of the types of arrangements and oversight involved in the US banking system are provided by the Federal Reserve:
The Council also plays a major role in the oversight and regulation of the US banking system. It has oversight responsibilities for state-charter banks that are members of the Federal Reserve System, bank holding companies (companies that control banks), foreign activities of member banks, activities of US foreign banks, and the Edge Act and "corporate agreements" ( limited destination institutions involved in foreign banking business). Council and, under delegated authority, the Federal Reserve Bank, oversees about 900 member state banks and 5,000 parent banks. Other federal agencies also serve as the primary federal supervisor of commercial banks; The Office of the Financial Currency Supervisor oversees the national bank, and the Federal Deposit Insurance Corporation oversees the state banks that are not members of the Federal Reserve System.
Some rules issued by the Council apply to the entire banking industry, while others only apply to member banks, ie state banks that have chosen to join the Federal Reserve System and national banks, which by law must be a member of the System. The Council also passed regulations to enact major federal laws governing consumer credit protection, such as Truth in Lending, Similar Credit Opportunities, and Mortgage Disclosure Laws. Many of these consumer protection regulations apply to various lenders outside the banking industry as well as banks.
Members of the Board of Governors continue to be in touch with other policymakers in government. They often testify before congressional committees on economics, monetary policy, banking supervision and regulation, consumer credit protection, financial markets, and other matters.
The Council has regular contacts with members of the President's Economic Advisory Board and other key economic officials. The Chair also meets from time to time with the President of the United States and holds regular meetings with the Minister of Finance. The chairman has formal responsibilities in the international arena as well.
Regulatory and supervisory responsibilities
The board of directors of each Federal Reserve Bank District also has regulatory and supervisory responsibilities. If the board of directors of a district bank has judged that the member bank is performing poorly, it will report this to the Board of Governors. This policy is described in the United States Code:
Every Federal reserve bank will continue to know about the general character and the amount of loans and investments of its member banks in order to ascertain whether undue use is made of bank credit to carry speculative or securities, real estate, or commodity trades, or for other purposes inconsistent with the maintenance of healthy credit conditions; and, in determining whether to grant or deny a down payment, rediskon, or other credit accommodation, the Federal reserve bank should consider such information. The chair of a Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any undue bank credit utilization by any member bank, together with its recommendations. Whenever, in the Board of Governors' assessment of the Federal Reserve System, any member bank makes inappropriate use of bank credit, the Council may, in its discretion, upon reasonable notice and opportunity for trial, suspend the bank from the use of credit facilities from the Federal Reserve System and may stop the suspension or update it from time to time.
National payment system
The Federal Reserve plays an important role in the US payment system. Twelve Federal Reserve Banks provide banking services to depository agencies and to the federal government. For depositors, they maintain accounts and provide various payment services, including collecting checks, transferring funds electronically, and distributing and receiving currency and coins. For the federal government, the Reserve Bank acts as a fiscal agent, paying Treasury checks; processing electronic payments; and publish, transfer, and redeem US government securities.
In the Deregulation of the Institute for Storage and Monetary Control in 1980, Congress reiterated that the Federal Reserve should promote an efficient national payment system. Subjects act on all storage institutions, not just members of commercial banks, for reserve requirements and grant them equal access to the Bank's Reserve payment service. The Federal Reserve plays a role in the national retail and wholesale payment system by providing financial services to storage agencies. Retail payments are generally for a relatively small amount of dollars and often involve retail clients of storage institutions? -? Individuals and small businesses. Reserve Bank retail services include distributing currencies and coins, collecting checks, and transferring funds electronically through an automated clearinghouse system. In contrast, wholesale payments are generally for large sums of dollars and often involve large corporate customers or counterparty partners, including other financial institutions. Reserve Bank's wholesale services include electronic funds transfer through the Fedwire Fund Services and transferred securities issued by the US government, agencies, and certain other entities through the Fedwire Securities Service.
Maps Federal Reserve System
Structure
The Federal Reserve System has a "unique public and private structure" and is described as "independent in government" rather than "independent of government". The system does not require public funding, and obtains its authority and purpose from the Federal Reserve Act, passed by Congress in 1913 and is subject to the modification or revocation of Congress. The four main components of the Federal Reserve System are (1) the Board of Governors, (2) the Federal Open Market Committee, (3) twelve regional Federal Reserve Banks, and (4) member banks throughout the country.
Board of Governors
The seven-member Board of Governors is a federal agent. It is charged with overseeing the 12 District Reserve Banks and establishing a national monetary policy. It also oversees and regulates the US banking system in general. The governor was appointed by the President of the United States and confirmed by the Senate for a staggering 14 year period. One term begins every two years, on the 1st of an even year, and a full-time member can not be nominated for a second term. "[U] pounds the end of their term of office, Board members will continue to serve until their successors are appointed and qualified." The law provides for the removal of members of the council by the President "for reasons". The Council is required to make an annual report of operations to the Chairman of the US House of Representatives.
Chairman and Deputy Chairman of the Board of Governors are appointed by the President from among the Governors sitting. They both served a four-year term and they can be re-stamped as elected by the President, until their term in the Board of Governors ends.
List of Board of Governors
Current members of the Board of Governors are as follows:
* Shows the end date of the time period for the nominated individual to this vacant position.
Nominations, confirmation and resignation
In late December 2011, President Barack Obama was nominated Jeremy C. Stein, a Harvard University finance professor and a Democrat, and Jerome Powell, formerly of Dillon Read, Bankers Trust and The Carlyle Group and a Republican. Both candidates also have experience of the Treasury in the Obama administration and George H. W. Bush respectively.
"Obama administration officials have regrouped to identify the Fed candidate after Peter Diamond, a Nobel Prize-winning economist, withdrew his candidacy to the council in June [2011] in the face of Republican opposition Richard Clarida, a potential candidate who is a Treasury Official at under George W. Bush, withdrew from consideration in August [2011] ", one account of the December nomination noted. Two other Obama nominees in 2011, Yellen and Raskin, were confirmed in September. One of these vacancies was made in 2011 with the resignation of Kevin Warsh, who came to power in 2006 to fill an unending term on January 31, 2018, and resign from his post effective March 31, 2011. In March 2012, US Senator David Vitter (R , LA) said he would oppose Obama's nominations, Stein and Powell, dampen short-term expectations for approval. But the Senate leaders reached an agreement, paving the way for an affirmative vote in two nominations in May 2012 and bringing the board to full force for the first time since 2006 with Duke's services after the end. Then, on January 6, 2014, the United States Senate confirmed Yellen's nomination as Chairman of the Board of Governors of the Federal Reserve; She is scheduled to become the first woman to hold the position and will become Chairman on February 1, 2014. Subsequently, President Obama nominated Stanley Fischer to replace Yellen as Vice Chairman.
In April 2014, Stein announced he would return to Harvard on May 28 with four years remaining in his tenure. At the time of the announcement, the FOMC "has already dropped three members for awaiting confirmation of the Senate... Fischer and Lael Brainard, and as [President] Obama has not mentioned a successor... Duke... Powell still serves as he awaits confirmation for a second term. "
Allan R. Landon, former president and CEO of Bank of Hawaii, was nominated in early 2015 by President Obama to the council.
In July 2015, President Obama nominated University of Michigan economist Kathryn M. Dominguez to fill the second position on the council. The Senate has not acted on Landon's confirmation at the time of the second nomination.
Daniel Tarullo submits his resignation from the council on February 10, 2017, effective on or about 5 April 2017.
Federal Open Market Committee
The Federal Open Market Committee (FOMC) consists of 12 members, seven from the Board of Governors and 5 from the regional Federal Reserve Bank presidents. The FOMC oversees and sets policy on open market operations, the main tool of national monetary policy. This operation affects the amount of Federal Reserve balances available to the depository, thereby affecting overall monetary and credit conditions. The FOMC also directs operations performed by the Federal Reserve on the foreign exchange market. The FOMC must reach consensus on all decisions. The President of the Federal Reserve Bank of New York is a permanent member of the FOMC; presidents of other banks rotate membership at intervals of two and three years. All presidents of the Regional Reserve Bank contributed to the assessment of economic committees and policy options, but only five presidents later became members of the FOMC vote on policy decisions. The FOMC determines its own internal organization and, by tradition, elects the Chairman of the Board of Governors as chairman and president of the Federal Reserve Bank of New York as vice chairman. Formal meetings are usually held eight times each year in Washington, D.C. The President of the Nonvoting Reserve Bank also participates in the discussions and discussions of the Committee. The FOMC generally meets eight times a year in telephone consultations and other meetings are held when needed.
Federal Advisory Board
The Federal Advisory Board, consisting of twelve representatives of the banking industry, advised the board on all matters in its jurisdiction.
Bank Federal Reserve
There are 12 Federal Reserve Banks, each of which is responsible for the member banks located in his district. They are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The size of each district is determined based on the distribution of the population of the United States when the Federal Reserve Act is passed.
The charter and organization of each Federal Reserve Bank is defined by law and can not be changed by member banks. However, member banks, voted for six of the nine members of the board of directors of the Federal Reserve Bank.
Each Regional Bank has a president, who is the executive director of their Bank. Every regional president of the Reserve Bank is nominated by the board of directors of their Bank, but his nomination depends on the approval of the Board of Governors. The President serves a five-year requirement and can be reappointed.
Each Bank's regional council consists of nine members. Members are divided into three classes: A, B, and C. There are three board members in each class. Class A members are selected by the regional Bank's shareholders, and are intended to represent the interests of member banks. Member banks are divided into three categories: large, medium, and small. Each category selects one of the three members of the Class A board. The Class B board members are also nominated by the member banks in the region, but members of the B class council should represent the public interest. Finally, members of the class C board are appointed by the Board of Governors, and are also intended to represent the public interest.
Federal Reserve Bank's regional legal status
The Federal Reserve Bank has intermediate legal status, with some features from private companies and some features of public federal agencies. The United States has an interest in the Federal Reserve Bank as tax-exempt agencies, whose profits are owned by the federal government, but these are not proprietary. In Lewis v. United States, the US Court of Appeal for the Ninth Circuit stated that: "The Reserve Bank is not a federal tool for the Federal Tort Claims Act, but it is independent, privately owned and locally controlled." The next opinion says , however, that: "The Reserve Bank has been properly held to be a federal tool for multiple purposes." Another relevant decision is Scott v. Federal Reserve Bank of Kansas City, where differences are made between the Federal Reserve Bank, which is an instrument established by the federation, and the Board of Governors, which is a federal agent.
Regarding the structural relationship between twelve Federal Reserve banks and commercial banks (members), political science professor Michael D. Reagan has written that:
... "ownership" of the Reserve Bank by commercial banks is a symbol; they do not exercise ownership control related to the concept of ownership or distribution, outside of legal dividends, in the Reserve Bank's "profit".... Ownership and selection of banks on a basis has no substantive significance, regardless of the superficial private bank control's appearance created by formal arrangements.
Member Bank
A member bank is a private institution and holds a stake in its regional Federal Reserve Bank. All leased national banks hold shares in one of the Federal Reserve Banks. State charter banks may choose to become members (and keep shares in their regional Federal Reserve bank) after meeting certain standards.
The amount of stock that a member bank must have equals 3% of its combined capital and surplus. However, holding a stake in a Federal Reserve bank is not like having a stake in a public company. These shares can not be sold or traded, and member banks do not control the Federal Reserve Bank as a result of owning these shares. From the profits of the Regional Bank becoming a member, the member bank receives a dividend of 6% of the shares purchased. The remainder of the Federal Reserve Bank's regional gains are granted to the US Treasury. In 2015, the Federal Reserve made a profit of $ 100.2 billion and distributed $ 2.5 billion of dividends to member banks and returned $ 97.7 billion to the US Treasury Department.
About 38% of US banks are members of their regional Federal Reserve Bank.
Accountability
GAO and outside auditors regularly audit Board of Governors, Federal Reserve Banks, and individual member banks. The audit does not cover "most of the Fed's monetary policy actions or decisions, including discount window loans (direct loans to financial institutions), open market operations and any other transactions conducted under the direction of the Federal Open Market Committee"... [or perhaps an GAO audit ] "deals with foreign governments and other central banks."
On August 27, 2012, the Federal Reserve Board has published unaudited financial statements for Federal Reserve banks each quarter. This is an extension of previous financial reporting practices. Greater transparency is offered with more frequent and more detailed disclosure.
November 7, 2008, Bloomberg L.P. News brought a lawsuit against the Board of Governors of the Federal Reserve System to force the board to disclose the identity of the company that has granted collateral during the 2007-2008 financial crisis. Bloomberg, L.P. wins in the hearing and the Fed appeals are denied in the US Court of Appeals for Second Circuit and US Supreme Court. Data released on March 31, 2011.
Monetary policy
The term "monetary policy" refers to actions taken by the central bank, such as the Federal Reserve, to affect the availability and cost of money and credit to help promote national economic goals. What happens to money and credit affects interest rates (credit costs) and economic performance. The Federal Reserve Act of 1913 authorizes the Federal Reserve to establish monetary policy in the United States.
Interbank Loans
The Federal Reserve establishes monetary policy by affecting the federal funds rate, which is the rate of interbank loans from excess reserves. The rate charged by each bank for these loans is determined on the interbank market and the Federal Reserve affects this level through the three monetary policy "tools" described in the Tool section below. The federal funds rate is the FOMC focused short-term interest rate, which affects long-term interest rates across the economy. The Federal Reserve summarized its monetary policy in 2005:
The Federal Reserve implements US monetary policy by affecting the conditions in the market for deposits held by depositors at the Federal Reserve Bank... By conducting open market operations, enforcing reserve requirements, enabling the depository to withhold contractual clearance balances, and extending credit through a window facility discount, the Federal Reserve exerts considerable control over the Federal Reserve's demand and supply balances and federal funds rate. Through its control of the federal funds rate, the Federal Reserve was able to foster financial and monetary conditions consistent with its monetary policy objectives.
The effect on the amount of reserves that banks use to make loans affect the economy. Policy actions that add reserves to the banking system encourage loans at lower interest rates thus stimulating the growth of money, credit and the economy. Backup policy actions work in the opposite direction. The Fed's job is to provide sufficient reserves to support sufficient amounts of money and credit, avoiding the excesses that lead to inflation and the shortages that impede economic growth.
Tools
There are three major monetary policy tools that the Federal Reserve uses to influence the amount of reserves in a private bank:
Federal funding rate and open market operations
The Federal Reserve System implements monetary policy largely by targeting federal funds levels. These are the rates that banks charge each other for overnight federal funds, which are reserves owned by banks in the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed. Therefore the Fed tries to align the federal funds rate effectively with the targeted rate by adding or subtracting from the money supply through open market operations. The Federal Reserve System typically adjusts the federal funds rate target by 0.25% or 0.50% at a time.
Open market operations allow the Federal Reserve to increase or decrease the amount of money in the banking system needed to balance the Federal Reserve's dual mandate. Open market operations are conducted through the sale and purchase of US Treasury guarantees, sometimes called "Treasury bills" or more informal "T-bills" or "Treasuries". The Federal Reserve buys Treasury bonds from its major dealers. The purchase of these securities affects the federal funds rate, since the primary dealer has an account at the depository.
The Federal Reserve education website illustrates the following open-market operations:
Open market operations involve buying and selling of US government securities (federal and mortgage-backed agents). The term 'open market' means that the Fed does not decide for itself which securities dealers will do business with on a given day. Instead, the choice arises from the 'open market' where various securities dealers that the Fed is doing business with? -? The main dealer? -? Compete on the basis of price. Open market operations are flexible and thus, the most commonly used monetary policy tool.
Open market operations are the main tool used to regulate bank reserves. This tool consists of the purchase and sale of Federal Reserve financial instruments, usually securities issued by the US Treasury, Federal agencies, and government-sponsored corporations. Open market operations are conducted by the Federal Reserve Bank of the Federal Reserve's Domestic Trade Desk under the direction of the FOMC. The deal is done with the main dealer.
The Fed's goal in securities trading is to influence the federal funds rate, the rate at which banks borrow reserves from each other. When the Fed wants to increase its reserves, it buys securities and pays them by making deposits into accounts held at the Fed by major dealer banks. When the Fed wants to reduce its reserves, it sells securities and collects from those accounts. Almost every day, the Fed does not want to permanently increase or decrease reserves so it usually does a reverse transaction within a day or two. That means that today's backup injection can be withdrawn tomorrow morning, only to be updated at some level a few hours later. This short-term transaction is called a repurchase agreement (repo)? -? The dealer sells Fed security and agrees to buy it back at a later date.
Repurchase agreement
To smooth the temporary change or cycle in the money supply, the table enters repurchase agreements (repo) with the primary dealer. Repos are basically secured, short-term loans by the Fed. On the day of the transaction, the Fed keeps the money in the primary dealer's reserve account, and receives the securities pledged as collateral. When the transaction matures, the process does not change: the Fed returns the collateral and weighs on the principal dealer's reserve account for accrued interest and principal. The term repo (time between settlement and maturity) may vary from 1 day (called a repo overnight) to 65 days.
Discount rate
The Federal Reserve System also directly sets the "discount rate", which is the interest rate for "discount window loans", overnight loans that member banks borrow directly from the Fed. This level is generally set at a rate of nearly 100 basis points above the target federal funds level. The idea is to encourage banks to seek alternative funding before using the "discount rate" option. Equivalent operations by the European Central Bank are referred to as "marginal lending facilities".
Both the discount rate and the federal funds rate affect the primary rate, which is usually about 3 percentage points higher than the federal funds rate.
Backup requirements
Another instrument of monetary policy adjustment used by the Federal Reserve System is the fractional reserve requirement, also known as the required reserve ratio. The required reserve ratio establishes the balance that the Federal Reserve System requires a depository to hold on the Federal Reserve Bank, which deposits the trading institutions in the federal funds market discussed above. The required reserve ratio is established by the Board of Governors of the Federal Reserve System. Backup requirements have changed over time and some of these change histories are published by the Federal Reserve.
In response to the financial crisis of 2008, the Federal Reserve is now making interest payments on the balance of necessary reserves and excess reserves of storage agencies. Interest payments on excess reserves provide a greater opportunity for the central bank to cope with credit market conditions while keeping the federal funds rate close to target levels set by the FOMC.
New facility
To address the problems associated with the subprime mortgage crisis and the housing bubble of the United States, several new tools have been created. The first new tool, called the Auction Facility, was added on December 12, 2007. It was first announced as a temporary tool but there are suggestions that this new tool may remain for a long time. The creation of a second new tool, called the Securities Lending Facility, was announced on March 11, 2008. The main difference between the two facilities is that the Auction Facility is used to inject cash into the banking system while the Securities Lending Facility is used to inject treasury securities into in the banking system. The creation of a third tool, called the Main Dealer Credit Facility (PDCF), was announced on March 16, 2008. The PDCF is a fundamental change in Federal Reserve policy because now the Fed can lend directly to major dealers, previously against Fed policy. The difference between these three new facilities is explained by the Federal Reserve:
The Program of Auction Auction Period offers long term funding to the depository through a two-week auction, for a fixed credit amount. The Term Securities Lending Facility will be the auction for a fixed loan amount from a Treasury general guarantee in exchange for securities guaranteed by its qualified KPR. The Main Dealer Credit Facility now enables the main dealer who is eligible to borrow at an existing Discount Price of up to 120 days.
Some steps taken by the Federal Reserve to address this mortgage crisis have not been used since the Great Depression. The Federal Reserve provides a brief summary of this new facility:
As the economy has slowed in the last nine months and credit markets have become unstable, the Federal Reserve has taken a number of measures to help resolve the situation. These measures include the use of traditional monetary policy tools at the macroeconomic level as well as measures at a given market level to provide additional liquidity.
The Federal Reserve's response continues to expand since pressure on credit markets began to emerge last summer, but all of these actions come from traditional open-market operations and Fed discount window tools by extending the term of the transaction, the type of collateral, or the eligible borrower.
The fourth facility, Term Deposit Facility, was announced December 9, 2009, and approved April 30, 2010, effective June 4, 2010. The Term Deposit Facility allows the Reserve Bank to offer time deposits to eligible institutions to receive a return on their balance in the Reserve Bank. Time deposits are intended to facilitate the implementation of monetary policy by providing tools that can be used by the Federal Reserve to manage the amount of reserve reserve balances deposited by the depository. Funds placed in term deposits are removed from accounts of participating institutions for the life of time deposits and thereby depleting the balance of reserves of the banking system.
Futures auction facility
The Auction Auction facility is a program in which the Federal Reserve auctions terms funds for storage agencies. The creation of this facility was announced by the Federal Reserve on 12 December 2007, and was conducted in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank to address high pressure in the short term. long-term funding market. The reason is that banks do not lend to each other and banks that require funds refuse to go to discount windows. Banks do not lend money to each other because there is a fear that the loan will not be repaid. Banks refuse to enter the discount window because it is usually associated with the stigma of bank failure. Under the Auction Facility Term, the identity of the bank that requires protected funds to avoid the stigma of bank failure. The foreign exchange lines with the European Central Bank and the Swiss National Bank were opened so that European banks could have access to the US dollar. Federal Reserve Chairman Ben Bernanke briefly described the facility to the US House of Representatives on January 17, 2008:
The Federal Reserve has recently launched auction auction facility, or TAF, through which a specified number of discounted window credits can be auctioned to eligible borrowers. The objective of TAF is to reduce incentives for banks to accumulate cash and increase their willingness to provide credit to households and companies... TAF auctions will continue as long as necessary to cope with high pressure in short-term funding markets, and we will continue working closely and cooperatively with other central banks to address market tensions that could hamper the achievement of our broader economic goals.
This is also described in the FAQ of the Auction Facility
TAF is a credit facility that allows depositors to bid for down payment from the local Federal Reserve Bank at an interest rate determined as a result of the auction. By allowing the Federal Reserve to inject long-term funds through a wider range of partners and to broader guarantees than open market operations, this facility can help ensure that liquidity provisions can be disseminated efficiently even when unsecured interbank markets are under pressure.
In short, TAF will auction a fund of approximately one month of maturity. All storage institutions that are assessed in good financial condition by their local Reserve Bank and who are eligible to borrow at a discount window are also eligible to participate in TAF auctions. All TAF credits must be fully guaranteed. Deposits can guarantee various guarantees received for other Federal Reserve loan programs to obtain TAF credit. The same collateral and margin values ​​applicable to other Federal Reserve lending programs will also apply to TAF.
Time loan securities facility
The Term Securities Lending Facility is a 28-day facility that will offer Treasury general guarantees to the Federal Reserve Bank of a New York primary dealer in exchange for another program-qualified guarantee. It is intended to promote liquidity in the financing market for Treasury and other collateral and thus to help the financial market function more generally. Like the Auction Facility, TSLF is conducted in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank. Resources allow dealers to transfer less liquid debt to easily tradable US government securities. The swap currency line with the European Central Bank and Swiss National Bank increased.
Primary dealer credit facility
The Main Dealer Credit Facility (PDCF) is an overnight loan facility that will provide funding to the primary dealer in exchange for certain guarantees and is intended to assist the financial market functioning more generally. The new facility marks a fundamental shift in Federal Reserve policy because now major dealers can borrow directly from the Fed when it was previously banned.
Interest over reserve
In October 2008, the Federal Reserve Bank will pay interest on the reserve balance (required and excess) held by the depository. This value is set at the lowest federal funds level during the institutional maintenance period of the reserve, less than 75 bp. On October 23, 2008, the Fed has reduced the spread to just 35 bp.
Time deposit facility
The Term Deposit Facility is a program in which the Federal Reserve Bank will offer interest-bearing deposits to eligible institutions. By removing "excess deposits" from participating banks, the overall level of available reserves for the loan is reduced, which will result in an increase in market rates, acting as a brake against economic activity and inflation. The Federal Reserve has stated that:
Time deposits will be one of the few tools that the Federal Reserve can use to clear reserves when policymakers judge that it is appropriate to start moving into a less accommodative monetary policy stance. The development of TDF is a wise planning issue and has no implications for the implementation of short-term monetary policy.
The Federal Reserve initially endorsed up to five "small value offerings designed to ensure the effectiveness of TDF operations and provide qualified institutions with an opportunity to gain familiarity with time deposits procedures." After three successful bidding auctions have been announced, a small value auction will continue on an ongoing basis.
The Term Deposit Facility is basically a tool available to reverse the efforts it has used to provide liquidity to financial markets and to reduce the amount of capital available to the economy. As stated in Bloomberg News:
Policy makers led by Chairman Ben S. Bernanke are preparing for the day when they should start sucking more than $ 1 trillion in excess reserves from the banking system to contain inflation. The Fed is mapping back eventually to a normal monetary policy, even as the weakened short-term outlook has increased the likelihood it could expand its balance sheet.
Chairman Ben S. Bernanke, testified before the House Committee on Financial Services, described the Term Deposit Facility and other facilities to Congress in the following terms:
Most importantly, in October 2008, Congress granted Federal Reserve legislation to pay interest on retained bank balances in the Federal Reserve Bank. By raising interest rates on bank reserves, the Federal Reserve will be able to put significant pressure on all short-term interest rates, because banks will not supply short-term funds to money markets at prices far below what they can earn. by holding reserves at the Federal Reserve Bank. An actual and prospective short-term interest rate increase will be reflected in turn in higher long-term interest rates and in more stringent financial conditions...
As an additional means to deplete reserves, the Federal Reserve is also developing plans to offer time deposits to depositors, which are roughly similar to the deposit certificates that the agency offers to their customers. A proposal explaining the deposit facility was recently published in the Federal Register, and the Federal Reserve is finalizing a revised proposal in light of public comments already received. After the revised proposal is reviewed by the Board, we expect to conduct a test transaction this spring and have the facilities available if necessary afterwards. The use of inverted repos and storage facilities will together allow the Federal Reserve to spend hundreds of billions of dollars in reserves from the banking system pretty quickly, should he choose to do so.
When this tool is used to drain reserves from the banking system, they do so by replacing bank reserves with other obligations; the asset side and overall size of the Federal Reserve's balance sheet remain unchanged. If necessary, as a way of imposing monetary restrictions, the Federal Reserve also has the option to redeem or sell securities. Redemption or sale of securities will have the effect of reducing the size of the Federal Reserve's balance sheet as well as reducing the amount of reserves in the banking system. Returning the size and composition of the balance sheet to a more normal configuration is the long-term goal of our policy. However, the sequencing of measures and combinations of tools used by the Federal Reserve out of its current highly accommodative policy stance will depend on economic and financial developments and our best judgment on how to meet the Federal Reserve's dual mandate for maximum work and price stability.
In short, in response to the severe threat to our economy, the Federal Reserve created a series of specialized loan facilities to stabilize the financial system and encourage the resumption of private credit flows to American families and businesses. As market conditions and economic prospects have improved, these programs have been discontinued or are being phased out. The Federal Reserve also promotes economic recovery through sharp reductions in its targets for federal funds levels and through the purchase of large-scale securities. The economy continues to require accommodative monetary policy support. However, we have been working to ensure that we have the tools to reverse, at the right moment, the current high level of monetary stimulus. We have full confidence that, when the time comes, we will be ready to do so.
Assets Supported Facilities Money Market Paper Commercial Mutual Funds Commercial Mutual Fund
The Asset Backed Commercial Paper Money Market The Mutual Fund Investment Facility (ABCPMMMFLF) is also called AMLF. The facility started operations on September 22, 2008, and closed on February 1, 2010.
All US depository, parent company of the bank (parent company or affiliate broker of U.S. dealer), or US branch and institution of a foreign bank entitled to borrow under this facility in accordance with the FRBB policy.
Guarantees eligible for appointments under the Facility are required to meet the following criteria:
- purchased by the Borrower on or after September 19, 2008 of a registered investment company which controls it as a money market fund;
- purchased by the Borrower at the Fund's acquisition cost as adjusted for premium amortization or incremental discount on ABCP through the date of purchase by the Borrower;
- is assessed when promised to the FRBB, not lower than A1, F1, or P1 by at least two major rating agencies or, if ranked by only one major rating agency, ABCP must have been rated in the top ranking category by that agency;
- issued by an entity subject to the laws of the United States or its political section under the existing program of 18 September 2008; and
- has expressed a maturity not exceeding 120 days if the Borrower is a bank or 270 days for the non-bank borrower.
Commercial Paper Funding Facility
On October 7, 2008, the Federal Reserve expanded again the collateral to be loaned to include commercial paper using the Commercial Paper Financing Facility (CPFF). The move made the Fed an important source of credit for non-financial businesses other than commercial banks and investment companies. Fed officials say they will buy as much debt as needed to restore market function. They refuse to say how much is possible, but they note that about $ 1.3 trillion of commercial paper will qualify. There's $ 1.61 trillion in outstanding commercial paper, seasonally adjusted, on the market as of October 1, 2008, according to latest data from the Fed. That's down from $ 1.70 trillion in the previous week. Since the summer of 2007, the market has shrunk from more than $ 2.2 trillion. The program lends a total of $ 738 billion before closing. Forty-five of the 81 companies participating in the program are foreign companies. Research shows that recipients of Assigned Asset Aid (TARP) are twice as likely to participate in the program than any other commercial letter issuer who does not take advantage of the TARP bailout. The Fed has not suffered a loss from CPFF.
Quantitative Policies
A little used Federal Reserve tool is quantitative policy . With it the Federal Reserve actually bought back corporate bonds and mortgage-backed securities held by banks or other financial institutions. It basically puts money back into financial institutions and allows them to lend and do normal business. The US housing bubble blast prompted the Fed to buy mortgage-backed securities for the first time in November 2008. More than six weeks, a total of $ 1.25 trillion was bought to stabilize the housing market, about one-fifth of all US Government-backed Mortgages.
History
Banking centers in the United States, 1791-1913
The first attempt at the national currency was during the American Revolutionary War. In 1775, the Continental Congress, as well as the states, began issuing paper currency, calling the "Continentals" bill. The Continentals are only supported by future tax revenues, and are used to help finance the Revolutionary War. Overprinting, as well as English forgery, caused the value of Continental to decrease rapidly. This experience with banknotes prompted the United States to remove the power to issue Bills of Credit from the draft new Constitution on August 16, 1787, and prohibit the publication by various states, and restrict the states. 'Ability to make anything except the legal tender of gold or silver coins on 28 August.
In 1791, the government granted the US First Bank Charter to operate as a US central bank until 1811. The First Bank of the United States came to an end under President Madison because Congress refused to renew its charter. The Second Bank of the United States was founded in 1816, and lost its authority to become the US central bank twenty years later under President Jackson when his charter expired. Both banks are based on the Bank of England. Ultimately, the third national bank, known as the Federal Reserve, was founded in 1913 and still exists to this day.
First First and Second Central Bank, 189
First Central Bank, 1791 and Second Central Bank,The first US institution with central banking responsibility was the First Bank of the United States, hired by Congress and signed into law by President George Washington on 25 February 1791, at the urging of Alexander Hamilton. This was done despite strong opposition from Thomas Jefferson and James Madison, among many others. The charter was for twenty years and ended in 1811 under President Madison, as Congress refused to renew it.
However, in 1816, Madison revived it in the form of the Second Bank of the United States. Years later, preliminary reforms of the bank charter became a major problem in President Andrew Jackson's re-election. After Jackson, who opposed the central bank, was re-elected, he withdrew government funds out of the bank. Jackson is the only President who actually paid off the debt. The bank charter was not renewed in 1836. From 1837 to 1862, in the Era of Free Banking there was no official central bank. From 1846 to 1921, an Independent Financial System ruled. From 1863 to 1913, a national bank system was instituted by the National Banking Act 1863 in which a series of bank panic, in 1873, 1893, and 1907 occurred.
Third Central Bank Creation, 1907-1913
The main motivation for the third central banking system came from Panic of 1907, which led to new demands for banking and currency reform. During the last quarter of the 19th and early 20th centuries, the US economy experienced a series of financial panic. According to many economists, the previous national banking system has two major disadvantages: non-elastic currencies and lack of liquidity. In 1908, Congress passed the Aldrich-Vreeland Act, which provided emergency currency and established the National Monetary Commission to study banking and currency reforms. The National Monetary Commission returned with recommendations that were repeatedly rejected by Congress. The revisions made during a secret meeting on Jekyll Island by Senator Aldrich and representatives of the country's leading financial and industrial groups later became the basis of the Federal Reserve Act. The House of Representatives voted on December 22, 1913, with 298 votes to 60 no. The Senate voted 43-25 on December 23, 1913. President Woodrow Wilson signed the bill that day.
Federal Reserve Act, 1913
The head of the bipartisan National Monetary Commission is a financial expert and Republican Senate leader Nelson Aldrich. Aldrich composed two commissions - one to study the American monetary system in depth and the other, led by Aldrich himself, to study the European central bank system and report it.
In early November 1910, Aldrich met with five famous members of the New York banking community to draft the central bank. Paul Warburg, a meeting participant and long-time advocate of central banking in the US, later wrote that Aldrich "confused altogether that he had been absorbed abroad and he was faced with the difficult task of writing highly technical bills while being harassed by his daily grind of parliamentary duties". After ten days of consideration, the bill, which would later be referred to as the "Aldrich Plan", was approved. It has several key components, including a central bank with headquarters headquartered in Washington and fifteen branches located across the US in geographically strategic locations, and a uniformly elastic currency based on gold and commercial paper. Aldrich believes that the central bank system without political involvement is the best, but it is assured by Warburg that a plan without public control is not politically feasible. The compromise involves public sector representation on the Board of Directors.
The bill Aldrich many opposed by politicians. Critics charged Aldrich for being biased because of his close relationship with wealthy bankers such as J. P. Morgan and John D. Rockefeller, J
Source of the article : Wikipedia
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