Bookmark Current Page
Edit Metric
|
||||||||||||||||||||
Details
|
||||||||||||||
| 
Federal Reserve
Edit
History
Top Contributors
|
| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
The Federal Reserve is the third central bank of the USA. It was legally established on December 23, 1913, when US president Woodrow Wilson signed the Federal Reserve System Act. The Federal Reserve was blamed to have deepened the Great Depression after the crash of 1929. In a panicky reaction it then deflated money supply, causing a lasting and deep economic contraction.
In the inflationary period from 1973 - caused by the first oil shock - to 1981 chairman Paul Volcker managed to battle inflation successfully by raising the leading interest rate to more than 20%. At the same time Volcker succeeded in keeping the economy out of a drawn-out recession.
The policy style changed with the nomination of Alan Greenspan in 1987. Only 2 months into office Greenspan was confronted with the Black Monday of 1987, when the Dow Jones Industrials Average fell 22%, its biggest loss ever in a day. Remembering the fatal results of tight liqudity after the crash of 1929 Greenspan offered banks all the funds they needed in order to avoid a meltdown of the stock market. Alan Greenspan can also be credited with blowing up the biggest debt bubble of all times in the new millennium. By lowering the Fed Funds rate to a record low of 1% the Federal Reserve contributed heavily to the American housing boom that turned out to be a bubble based on easy credit. Greenspan conceded in 2008 to Congress that he erred on wrong side when the Federal Reserve thought that the financial industry should not be burdened with more oversight. At this time the USA had fallen in the biggest financial crisis ever.
Contents |
[edit] Monetary Policy
The Federal Reserve follows a two-pronged policy. Its mandate says the Federal Reserve has to ensure economic growth while fighting inflation. It does so by providing or absorbing liquidity in its open market operations.
While the Fed's most important tool are its regular refinancing operations where it adjusts liquidity to prevent inflation, the current crisis has brought a host of new debt facilities which are used to intervene in both the market for mortgage backed securities and the commercial paper market.
After a rapid succession of rate cuts the Federal Reserve arrived at zero interest rate policy on December 16, 2008, when it cut the Fed Funds rate from 1% to a range between 0% and 0.25%, largely closing up to short maturities of Treasury debt which traded below the upper threshold the same day.
[edit] The Federal Open Market Committee
The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System. It is responsible for formulation of a monetary policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. The FOMC in its current form was created by the Banking Act of 1935.
The FOMC sets monetary policy by specifying the short-term objective for open market operations--purchases and sales of U.S. government and federal agency securities. Open market operations, the principal tool of monetary policy, affect the provision of reserves to depository institutions and, in turn, the cost and availability of money and credit in the U.S. economy. Currently, the objective is a target level for the federal funds rate (the rate that depository institutions charge on overnight sales of immediately available funds among themselves).
The FOMC also directs Federal Reserve operations in foreign currencies; such operations are coordinated with the U.S. Treasury, which has responsibility for formulating U.S. policies regarding the exchange value of the dollar.
The Federal Open Market Committee consists of twelve voting members: the seven members of the Board of Governors and five of the twelve Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves on a continuous basis; the presidents of the other Reserve Banks serve one-year terms on a rotating basis beginning on January 1 of each year. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco.
All of the Reserve Bank presidents, even those who are not currently voting members, attend FOMC meetings, participate in the discussions, and contribute to the assessment of the economy and of policy options. The FOMC holds eight regularly scheduled meetings during the year, and other meetings as needed. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
[edit] Transparency
The FOMC has changed its publicy policy substantially under the tenure of Alan Greenspan. The FOMC first announced the outcome of a meeting in February 1994. After making several further post-meeting statements in 1994, the Committee formally announced in February 1995 that all changes in the stance of monetary policy would be immediately communicated to the public. In January 2000, the Committee announced that it would issue a statement following each regularly scheduled meeting, regardless of whether there had been a change in monetary policy. In 2004 the FOMC cut the release time of the Minutes of the FOMC meeting from 6 to 3 weeks in order to give markets an even better idea about the thought process inside the Fed. The Federal Reserve chairmen usually appears twice a year on Capitol Hill to brief policymakers on the current situation of the economy and takes their questions. The Fed does not hold press conferences after its meetings as does its Eurozone counterpart, the ECB.
[edit] Short History Of FOMC Communications[1]
FOMC meetings were long held in relative secrecy. The Committee maintained extensive Minutes that were confidential and only published a sparse annual report called Records of Policy Actions until 1967. In a review of its policies in 1967 the FOMC decided to publish its minutes about 90 days after a FOMC meeting. At the same time the Federal Reserve introduced a new monthly bulletin covering financial and economic issues.
From June 1967 to March 1976, the Memorandum of Discussion served as the most detailed account of the discussion at each FOMC meeting. While Records of Policy Actions and Minutes of Actions were released during this period after 90 days, the more internally focused Memoranda of Discussion were made public with a lag of about five years.
It took until 1994 before the Fed started releasing a regular statement after its policiymaking meetings.
Complete transcripts of the FOMC meetings are made available at the Fed's website since 1967 with a delay of 5 years.
[edit] List of Fed Chairmen
- Charles S. Hamlin Aug. 10, 1914-Aug. 9, 1916
- W.P.G. Harding Aug. 10, 1916-Aug. 9, 1922
- Daniel R. Crissinger May 1, 1923-Sept. 15, 1927
- Roy A. Young Oct. 4, 1927-Aug. 31, 1930
- Eugene Meyer Sept. 16, 1930-May 10, 1933
- Eugene R. Black May 19, 1933-Aug. 15, 1934
- Marriner S. Eccles Nov. 15, 1934-Jan. 31, 1948
- Thomas B. McCabe Apr. 15, 1948-Mar. 31, 1951
- Wm. McC. Martin, Jr Apr. 2, 1951-Jan. 31, 1970
- Arthur F. Burns Feb. 1, 1970-Jan. 31, 1978
- G. William Miller Mar. 8, 1978-Aug. 6, 1979
- Paul A. Volcker Aug. 6, 1979-Aug. 11, 1987
- Alan Greenspan Aug. 11, 1987-Jan. 31, 2006
- Ben S. Bernanke Feb. 1, 2006-
The Chairman and the Vice Chairman of the Board are named by the President from among the members and are confirmed by the Senate. They serve a term of four years. A member's term on the Board is not affected by his or her status as Chairman or Vice Chairman.
[edit] Current Members of the Federal Reserve Board
- Donald L. Kohn (Vice Chairman)
- Elizabeth Duke
- Randall S. Kroszner
- Kevin Warsh
Under the provisions of the original Federal Reserve Act, the Federal Reserve Board was composed of seven members, including five appointive members, the Secretary of the Treasury, who was ex-officio chairman of the Board, and the Comptroller of the Currency. The original term of office was ten years, and the five original appointive members had terms of two, four, six, eight, and ten years respectively. In 1922 the number of appointive members was increased to six, and in 1933 the term of office was increased to twelve years. The Board of Governors meets regularly, typically every other Monday. There are currently 3 empty seats at the board.
[edit] Current Members of the FOMC
- Ben S. Bernanke, Board of Governors, Chairman
- Timothy F. Geithner, New York, Vice Chairman
- Elizabeth A. Duke, Board of Governors
- Richard W. Fisher, Dallas
- Donald L. Kohn, Board of Governors
- Randall S. Kroszner, Board of Governors
- Sandra Pianalto, Cleveland
- Charles I. Plosser, Philadelphia
- Gary H. Stern, Minneapolis
- Kevin M. Warsh, Board of Governors
[edit] Alternate Members
- Charles L. Evans, Chicago
- Jeffrey M. Lacker, Richmond
- Dennis P. Lockhart, Atlanta
- Janet L. Yellen, San Francisco
- Christine M. Cumming, First Vice President, New York
[edit] The Federal Reserve Banks
The 12 Federal Reserve Banks were established by Congress as the operating arms of the nation's central banking system. Many of the services provided to depository institutions and the federal government by this network of Reserve Banks are similar to services provided by commercial banks and thrift institutions to business customers and individuals.
Reserve Banks
- hold the cash reserves of depository institutions and make loans to them
- move currency and coin into and out of circulation, and collect and process millions of checks each day
- provide checking accounts for the Treasury, issue and redeem government securities, and act in other ways as fiscal agent for the U.S. government
- supervise and examine commercial banks that are members of the Federal Reserve System for safety and soundness
- participate in the activity that is the primary responsibility of the Federal Reserve System, the setting of monetary policy.
