The Organization of the Federal Reserve Bank
The United States economy is big and hard to manage, and therefore, the nation needs a huge system with a big number of institutions in order to maintain its economys safety. The Federal Reserve System is a very extended organization that includes a big number of institutions working together as the nations protecting shield against economic crises, and the most important institution in this organization is the Federal Reserve Bank. The highest authority in the system, the Federal Reserve Board (Board of Governors), works in conjunction with various advisory councils and committees in order to ensure the ability to carry out the Feds duties. The Federal Reserve System uses a number of powerful and effective tools to manage many economic factors, and those factors include prices and interest rates.
The Institutions That the Federal Reserve System (Fed) IncludesThe Federal Reserve Bank The main institution in the Federal Reserve System, headed by the Federal Reserve Board. The banks main headquarters is located in Washington DC. There are 12 regional Reserve Banks, each bank is located in a major city within its region. These regional Reserve Banks have 25 branches across their regions. Every regional Reserve Bank has its own nine-member board of directors regional member banks elect six, while the Federal Reserve Board appoints three and elects the chairman from among all members. Member Banks (or Member Institutions)
There are thousands of member banks including national banks and state chartered banks. The law requires national banks to join the Fed, while it allows other banks to join under certain conditions that the Board sets. A member bank must buy stock from the Federal Reserve Bank with a total value of investments equal to 3 of the total sum of its own capital and surplus. Each member bank receives a 6 annual dividend (fixed) and earns the right to elect members of the board of directors of its regional Reserve Bank.
The Management of the Federal Reserve SystemThe Board of Governors (Federal Reserve Board) The highest authority in the Federal Reserve System, and its responsible for supervising the operations and adjusting monetary policy according to the economys needs. The board consists of seven members one of them is appointed as the chairman and another as the vice chairman. Appointing the members of the board is the U.S. presidents duty, while the Senate is responsible for approving the appointments. The Federal Open Market Committee (FOMC)
This committee consists of 12 members The members of the Federal Reserve Board and five presidents of regional Reserve Banks. One of those five presidents must be the president of the New York Reserve Bank (permanent member). The other four presidents are appointed in the committee on a different basis the other 11 Reserve Banks are classified into four groups, one president from each group serves in the FOMC on a one-year rotating basis ( System , 2010, p. 1). Unlike the case of the Federal Reserve Board, its the FOMC members duty to elect their chairman and vice chairman. Usually, the results of any election is choosing the chairman of the Federal Reserve Board as chairman of the FOMC and the president of the regional New York Reserve Bank as vice chairman. Advisor Groups (Assisting the Board of Governors)
Federal advisory council. It consists of 12 members representing each of the the 12 regional Reserve Banks. The Board of Governors is responsible for appointing the members on an annual basis. This councils main goal is providing the Board of Governors with the necessary assistance regarding banking and economic issues. Consumer advisory council. It consists of 30 specialists who work with the Board on addressing and solving problems that face consumers and creditors.
Thrift institutions advisory council. It consists of a number of financial and economic experts who represent thrift institutions. Its main goal is providing the Board of Governors with assistance regarding issues that concern those institutions.
The Feds Responsibilities and Duties, and Its Tools for Handling Them
The Feds goals are Sustaining the growth of the economy, and stabilizing the financial and monetary systems. Its main tools to achieve these goals areSetting the Reserve-Level Rates (or Reserve Ratios)
This rate determines the proportion of the capital that a member bank must hold as a reserve (against deposits). Many economic factors determine the most appropriate reserve-level rate including the volume of business and consumer expenditures ( System , 2010, p. 1). The Fed sets the reserve-level rates to control many economic factors like money supply. If the Fed lowers the rate banks increase the amounts of funds they allow their customers to borrow, and raising the rate results in the exact opposite effect. Changing reserve-level rates has many other effects like changing interest rates and price levels. Setting Various Types of Interest Rates
Member banks can borrow from their regional Reserve Banks at a certain interest rate, this interest rate is known as the discount rate and its the Feds responsibility to set it. The purpose of setting this rate is regulating money supply to protect the economy from inflation and deflation. In the case of a possible threat of inflation, the Federal Reserve Bank raises the discount rate to regulate borrowing which decreases money supply. This is an effective tool for facing inflation but it has a negative effect on economic growth because it regulates borrowing and investing. In the case of a possible threat of deflation, the Federal Reserve Bank lowers the discount rate to stimulate business activity. Changing the discount rate has a direct effect on the federal funds rate , the interest rate at which a nonmember depository institution can borrow an overnight loan from a member one. In order to make profits, member institutions (lenders) make sure that federal funds rates on their loans are higher than the discount rate. Nonmember institutions that borrow overnight loans, in turn, make sure that their loans cost borrowers higher interest rates than federal funds rates in order to make profits. Unlike all other rates, the federal funds rate isnt fixed because it can vary from day to day and from bank to bank. Open-Market Operations
These are the operations of buying and selling securities that are issued by the U.S. federal government in the open market. The Federal Reserve Board issues most of the decisions regarding open-market operations, and the FOMC is responsible for conducting them. Buying government securities from banks results in increasing their funds and causing interest rates to drop. Selling securities results in the exact opposite effect.