The Federal Reserve’s Structure & Functions

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The Federal Reserve’s Structure & Functions

The Federal Reserve has not always been around to control and protect our economic conditions. Back in 1907 there was a major banking crisis that motivated congress to create a central bank. In 1913 the Federal Reserve Act was put in place to help monitor and control commercial banks by setting reserve requirements. The Reserve began as a system divided within 12 districts. Each district had a bank that decided on the money supply for that district over time this practice has changed and the power to make these decisions has been handed to a group of elected individuals. In this paper the structure and functions of the Federal Reserve will be discussed.

Structure

The Fed is made up of five major parts: Federal Reserve District Banks, Member Banks, Board of Governors, Federal Open Market Committee, and the Advisory committees.

Federal Reserve District Banks

There are a total of 12 district banks all located in various cities. Each bank has 9 directors, 3 Class A, 3 Class B, and 3 Class C. Class A directors are employees chosen by member banks to represent those banks. Class B directors are not affiliated with banks and are elected by member banks to represent the public. Class C are directors who are not affiliated with any banks but are selected by the Board of governors. The president of each district bank is chosen by the members of Class B and C.

Member Banks

Member banks are commercial banks who choose to become members once they meet the specific requirements set by the Board of Governors.

Board of Governors

The board of governors or Federal Reserve Board, is composed of seven appointed members. These members are stationed in Washington D.C. and are appointed by the President of the United States for a 14-year term. The purpose of the long term is to help avoid any politically inclines biases and encourage the members to work towards policies that will benefit the economy in the long run.

Federal Open Market Committee (FOMC)

The FOMC is made up of the seven members of the Board of Governors and the presidents of five district banks. The New York district bank is always included in meetings because it is one of the largest banks, but the other 4 are chosen on rotation. The presidents are present in meetings, but are not allowed to vote on for policy changes. The chairman of the Board of Governors serves as chairman for the FOMC. The goals of the FOMC are to achieve stable economic growth and price stability.

Advisory Committees

The Federal Advisory Council is made up of one member from each Federal Reserve District who represent the banking industry. Each member is selected by the board of directors of their bank.

The Consumer Advisory Council is made up of 30 members who represent the financial institution industry and their consumers.

The third advisory committee is the Thrift Institution Advisory Council is made up of 12 members representing savings banks, loan associations, and credit unions.

Federal Reserve’s Functions

The Federal Reserve System is the central bank for the United States. There are five main functions to the federal reserve that are to protect and better the U.S. economy and the best interest of the people.

Monetary Policy

The Feds most important task is to create monetary policy to control economic conditions and employment. One way the Fed controls the economy is by controlling the supply of funds which in effect impacts demand. When the fed increases the amount of funds available for lending interest rates drop, which then encourages borrowers to take out loans. And the other way around. It can refrain from supplying money leaving a low supply which then decreases demand for loans because of high interest rates.

Financial Protection

Protects the economy by maintaining stability of the financial systems.

Regulation

The fed monitors and regulates financial institutions. They are in charge of regulating financial products such as online banking, mortgages, and certificates of deposit.

Payment Safety

They ensure payment and settlement systems to for banks and investors.

Research

Researches data to help the continuous efforts towards healthy economic conditions.

Effects on Interest Rates & Financial Markets

Monetary policy has an impact on the entire economy. It is like a domino, when one is affected the other is too and it can be either positive or negative depending on which side you are. The fed has the power to influence both the demand and supply. It can’t control it, but it can very well influence it. The way it does this is by determining on how much money to pump into the commercial banks. If the Fed decides to increase the supply then interest rates can go down. This is more attractive for consumers looking to borrow funds. But for investors, this is not as appealing. Low interest rates means low return on their securities.

If the Fed decides to restrict the supply of funds then interest rates rise. This makes borrowing money less appealing. But for investors, this is a good thing.

If the Fed choses to utilize stimulative monetary policy it ca result in inflation. This means wages and prices will quickly and can have an adverse effect on the U.S. economy.

Conclusion

The Federal Reserve was put in place to protect the public and the U.S. economy as a whole. The decisions and policies put in place are there to help keep unemployment rates low, inflation low, and to protect both lenders and borrowers. Our economy needs to stimulated from time to time like it did when the financial crisis happened back in 2008. People lost their jobs, homes, and demand for loans was low. Increasing the supply of funds lowered interest rates and encouraged people to borrow and spend money. This in turn, little by little of course, starter to turn the wheel. Increasing the demand for products, employees, and money. It’s like a giant wheel and the Fed is just there to make sure it keeps on turning.