Federal Reserve System

Mandate: set policies that

• Promote maximum employment (low unemployment)

• Maintain stable prices (low inflation)

Board of governors (in Washington DC) - 7 members

• Can serve for 14-year terms

• Appointed by the president and confirmed by the Senate

• Chair serve 4 year terms and past three chairs:

  • Jerome Powell

  • Janet Yellen (first female chair, also first woman as US Treasury Secretary)

  • Ben Bernanke

12 Federal Reserve regional banks: 

• Atlanta, GA

• Boston, MA

• Chicago, IL

• Cleveland, OH

• Dallas, TX

• Kansas City, MO

• Minneapolis, MN

• New York, NY

• Philadelphia, PA

• Richmond, VA

• St. Louis, MO

• San Francisco, CA
  

How does the Fed achieve its mandates

• Mandate 1:  When the economy is in recession or heading into recession, the Fed can lower the short-term interest rate (called Federal Funds Rate which is the overnight lending rate that banks can borrow from each other) to lower borrowing costs of the banks.  Banks then have more money to lend to the economy and stimulate growth. 

• Mandate 2:  If the economy is growing too fast (measured by GDP), there is a risk of high inflation. Low inflation is good for the economy as wages keep up with price increases, but in high inflation, price increases are outpacing wage growth, constraining consumers.  To lower inflation, the Fed can increase interest rates (through Federal Funds Rate).

• Manage dual mandate:  The Fed cannot directly adjust long-term interest rates.  It can only raise/lower the Federal Funds Rate, which will impact the long-term interest rates.  The long-term interest rate is determined by the market price of the US Treasuries (government bonds issued by the US government) traded in the marketplace.  There are other tools that the Fed can use to help moderate the interest rate.