Federal Reserve System

Figure 2. Federal Reserve Districts, Wikimedia Commons

The Federal Reserve Act

The main purpose of the Federal Reserve when it was first established was to create elastic currency and to supervise the banking industry nationally.

The Federal Reserve Act created 12 regional Federal Reserve Banks in New York City, Boston, Cleveland, Philadelphia, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Minneapolis, San Francisco, and San Francisco. These banks' purpose is to supervise their region's financial and banking activities. This act also included the creation of the Federal Reserve Board, which would oversee these branches. The board has seven members, including the Secretary of the Treasury and the Comptroller of the Currency. The remaining five members would be appointed by the president, approved by theSenate, and serve for a 14-year term. The Federal Reserve Act initially gave the National Reserve Banks a 20-year charter.

National banks were required to join the Federal Reserve System by purchasing capital at their local Federal Reserve Bank, which would allow them to get loans and other services provided by the Federal Reserve Bank. For state banks, membership was optional. The members of the Federal Reserve System were required to hold their reserves in the local Reserve Bank.

McFadden Act

Due to the success that the Federal Reserve Banks had at stabilizing and growing the economy, the McFadden Act of 1927 removed the 20-year charter on the Banks. Legislators believed this would lead to continued economic stability but would help the Federal Reserve System be a more independent entity, free of partisan politics.

Banking Acts of 1933 & 1935

The Banking Acts of 1933 and 1935 were enacted in response to the Great Depression. Many blamed the Fed for the depression and not acting swiftly enough to try to quell it. These acts helped shape the Federal Reserve System into what it is today. The Federal Reserve Board was renamed the Board of Governors. The Board of Governors was given power over the Federal Reserve Banks and the ability to set discount rates. The Federal Open Market Committee was also created, and its role was defined within these two acts. The FOMC comprises the seven Board of Governors and five Reserve Bank Presidents and is meant to set monetary policy. The Reserve Banks, thanks to the act, are required to execute and implement any directives given by the FOMC. This act also removed the Secretary of Treasury and Comptroller of the Currency from the board.

The Federal Reserve Reform Act

The Federal Reserve Reform Act of 1977 impacted the Federal Reserve System by requiring that the results of the monetary policies that the Fed exercised would encourage price stability and maximize employment while reporting to congress regularly. It also required theSenateto approve the chair and vice chair of the board of governors and made their terms four years.

The Community Reinvestment Act

The Community Reinvestment Act of 1977 required the Federal Reserve System and other bank regulators to ensure that banks were meeting the credit needs of low and moderate-income communities.

Humphrey–Hawkins Act

The Full Employment and Balanced Growth Act of 1978, also known as theHumphrey–Hawkins Act, defined the Fed's mandate to secure maximum employment rates, encourage stable prices, and ensure low inflation.

The Depository Institution Deregulation and Monetary Control Act

The Depository institution deregulation and Monetary Control Act of 1980 gave non-member banks access to the Federal Reserve System's loans and services. It also made the Federal Reserve System charge for the services it provides while making all banks meet reserve requirements that had been set.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the Fed the ability to supervise the activities of non-bank entities that impacted the US financial market, as well as savings and loan holding companies. The Fed was made a member of the Financial Stability Oversight Council (FSOC), which is meant to oversee the financial system and see which financial entities threaten financial stability. It also ensured that the Fed couldn't make emergency loans to a single company unless it were part of a program open to a sector or industry.

Figure 3. Federal Reserve Headquarters, Dan Smith, CC-BY-SA-2.5, Wikimedia Commons

Federal Reserve System Policies

The following are a few of the main monetary policies that the Federal Reserve System commonly executes:

Discount Windows & Discount Rates

The Federal Reserve has the ability to provide discount windows and control the discount rate. The discount window are loans that the Fed lends out to depositary banks to help provide them with readily accessed funding and liquidity. This, in turn, allows banks to provide sufficient credit to citizens and businesses. Usually, discount windows have terms of up to 90 days.

The discount rate is the interest rate the Federal Reserve Banks charge for discount windows. Banks must provide short-term loans as collateral to use the discount rate. This helps turn bank loans into cash quickly, increasing the money supply.

Open Market Operations

The Federal Reserve has the ability to execute open market operations, and this means that they have the ability to buy and sell government securities. When the Fed buys securities, it credits the reserve accounts of the banks it purchased the securities from, increasing reserves, leading to those banks turning them into loans and increasing the supply of money. This then tends to lead to lower interest rates, which helps make credit more readily available to people and businesses, stimulating the economy. When securities are sold, the Fed reduces the amount of reserves which increases interest rates. This would then reduce personal and commercial spending, slowing down the economy to try to reduce inflation.

Federal Reserve System Example

During WWII, the Fed maintained the yield on long-term US government bonds under 2.5 percent and the ones. This allowed the Treasury to borrow money at lower rates to help finance the war by promoting war bond sales to the people.美联储使用货币政策t的另一个例子o improve the economy occurred during the Financial Crisis of 2007-2009. The Fed made a series of emergency loans to US financial institutions and encouraged banks to borrow funds to get enough liquidity that they needed. The FOMC cut the federal funds rate to almost zero, while purchasing US treasury and mortgage-backed securities, ensuring there was enough liquidity that would help to stimulate the economy. Although the Fed could not avert a recession, had it not acted the way it did, many believe the Great Recession that followed the financial crisis would have been worse.During the COVID-19 Crisis, the Fed implemented the same policies used during the financial crisis of 2007-2009 by reducing the federal funds rate to practically zero and purchasing a large quantity of US treasury and Mortgage-backed securities. Working with the Treasury, the Board of Governors established several programs to fund specific markets. Many credit these efforts with preventing a major financial crisis.