As an investor, it is important to have a basic knowledge of the Federal Reserve System (FRS). The Federal Reserve System was created by the US Congress in 1913. Before that, there was no formal organization for the study and implementation of monetary policy in the US government. Consequently, markets were often unstable, and the public had little confidence in the banking system. The Fed is an independent legal entity that is subject to Congressional oversight. This means that decisions do not have to be ratified by the president or anyone in the government; Congress periodically reviews the activities of the Fed.
The structure of the Fed
The Fed is headed by a government body in Washington, known as the Board of Governors of the Federal Reserve System. The Board of Governors consists of seven presidential appointees, each of whom is elected for a 14-year term. All members must be confirmed by the Senate, and they can be reappointed. The Council is headed by a Chairman and a Vice-Chairman, each of them is appointed by the President and approved by the Senate for a term of four years. The current chairman, Ben Bernanke, was sworn in on February 1, 2006 for a period of 4 years.
There are 12 regional Federal Reserve banks located in major cities across the country that operate under the direction of a Board of Governors.
Reserve banks and their sources
The reserve Banks act as the central bank's executive arm and carry out most of the Fed's work. Banks receive their own income from four main sources:
- Services provided to banks. Earnings from interest on government securities. Income received from foreign currency. Interest on loans to deposit institutions.
The income received from such activities is used to finance daily operations, including for collecting information and conducting economic research. Any excess revenue is sent back to the US Treasury.
The system also includes the Federal Open Market Committee, better known as the FOMC. It is the policy body of the Federal Reserve System.
Chairman of the FMS
Traditionally, the Chairman of the Management Board is also elected as the chairman of the FOMC.
The voting members of the FOMC are seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, as well as the presidents of four other reserve banks who serve for a term of one year. All Reserve Bank presidents, regardless of whether they participate in FOMC policy discussions, are voting members. The FOMC makes important decisions on interest rates and other monetary policy issues. It is for this reason that they receive so much attention in the media.
Duties of the Fed
The main responsibility of the Fed is "to promote sustainable growth, high employment, price stability, in order to help maintain the purchasing power of the dollar and moderate long-term interest rates."
In other words, the Fed's job is to form a healthy banking system and economy. To fulfill its mission, the Fed acts as a bank for bankers, a government bank, a regulator of financial institutions, as well as a money management manager.
The Fed also issues all coin and paper money. In fact, the US Treasury Department produces cash, and the Fed bank then distributes it to financial institutions.
The Fed is also responsible for checking depreciation accounts, withdrawing worn-out currency from circulation.
The Board of Governors of the Federal Reserve System (FRB) is responsible for regulating and supervising the work of banks. This includes monitoring the activities of banks that are members of the system, international banking institutions in the United States, foreign activities of member banks, as well as the activities of American foreign banks. The Fed also helps ensure that banks are acting in the public interest by helping to develop federal laws governing consumer credit. Examples are the Law on the Reliability of Information in Lending, the Law on Equal Access to Credit, the Law on Disclosure of Information related to Mortgages for Housing, and the Law on the Reliability of Information in the Field of Savings. In short, the FRB is a police officer who monitors banking activities in the United States and abroad.
The FRB also sets margin requirements for stock investors. This limits the amount you can borrow to buy an asset. Currently, the requirement is set at 50 percent; this means that with 500 USD, you have the opportunity to purchase assets worth up to 1,000 USD.
Most people perceive the Fed as a proper body. However, a growing minority believes that the economy will be better off without it. They say that let the market decide for itself the ratio between expenses and savings. Ultimately, the Fed acts to redistribute material values by increasing the money supply and cheap "lending" to banks by them, which, in turn, makes it possible to lend to people who put wealth first.