Federal Reserve System, Monetary Policy, and Interest Rates - Summary

Major Duties and Responsibilities of the Federal Reserve System:

Central banks control monetary policy.
The Federal Reserve (the Fed) was founded in 1913.
The Fed's original duties were to provide the nation with a safer, more flexible, and more stable monetary and financial system.
The objectives include economic growth, a high level of employment, stable prices, and moderate long-term interest rates.
The system is subject to oversight by the U.S. Congress.
The Fed's duties incorporate four major functions:
- Conducting monetary policy.
- Supervising and regulating depository institutions.
- Maintaining the stability of the financial system.
- Providing payment and other financial services.

The Federal Reserve System consists of 12 Federal Reserve Banks and a seven-member Board of Governors.
Federal Reserve Banks and the Federal Reserve Board of Governors form the Federal Open Market Committee (FOMC).

The Federal Reserve System is divided into 12 Federal Reserve districts.
Each district has one main Federal Reserve Bank.
The largest Federal Reserve Banks are New York, San Francisco, and Richmond.
The Federal Reserve Bank of New York (FRBNY) is generally considered the most important.
Federal Reserve Banks operate under the general supervision of the Board of Governors.
Each Federal Reserve Bank has its own nine-member board of directors.
Nationally chartered banks are required to become members of the Federal Reserve System (FRS).
Commercial banks that become members of the FRS are required to buy stock in their Federal Reserve district bank.
Federal Reserve Banks are quasipublic entities owned by member commercial banks in their district.

The Board of Governors of the Federal Reserve is a seven-member board headquartered in Washington, DC.
Each member is appointed by the president of the United States and confirmed by the Senate.
Board members serve a nonrenewable 14-year term.
The primary responsibilities are the formulation and conduct of monetary policy and the supervision and regulation of banks.
All seven board members sit on the Federal Open Market Committee.
The Federal Reserve Board sets bank reserve requirements and reviews and approves the discount rates set by the 12 Federal Reserve Banks.
The chair of the Federal Reserve Board advises the president of the United States on economic policy and serves as the spokesperson for the Federal Reserve System.

The Federal Open Market Committee (FOMC) is the major monetary policy-making body of the Federal Reserve System.
The FOMC consists of the seven members of the Federal Reserve Board of Governors, the president of the Federal Reserve Bank of New York, and the presidents of four other Federal Reserve Banks.
The chair of the Board of Governors is also the chair of the FOMC.
The FOMC is required to meet at least four times each year.
The main responsibilities of the FOMC are to formulate policies to promote full employment, economic growth, price stability, and a sustainable pattern of international trade.
The FOMC accomplishes this by setting guidelines regarding open market operations.
Associated with each meeting of the FOMC is the release of the Beige Book.

Assistance in the conduct of monetary policy.
Supervision and regulation of member banks and other large financial institutions.
Consumer protection.
Community affairs.
The provision of services such as new currency issue.
Check clearing.
Wire transfer.
Research services to the federal government, member banks, or the general public.

The Federal Reserve takes steps to influence monetary conditions.
Historically, the Fed has sought to influence the economy by directly targeting the quantity of bank reserves.

Table 4-7 goes one step further and looks at how the money supply, credit availability, interest rates, and security prices are affected by these monetary policy actions.
To do this, we categorize monetary policy tool changes into expansionary activities versus contractionary activities.

Central banks guide the monetary policy in virtually all countries.
Regardless of their independence, in the increasingly global economy, central banks around the world must work not only to guide the monetary policy of their individual countries, but also to coordinate their efforts with those of other central banks.

Negative rates have had powerful effects, in particular by driving down currencies, which helped boost inflation and exports.
Challenges to central banks became even bigger in June 2016 when the people of the United Kingdom voted to leave the EU after 43 years (Brexit).