Board of Governors of the Federal Reserve System

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Marketable securities held in custody for foreign official and international accounts. In , the Continental Congress, as well as the states, began issuing paper currency, calling the bills " Continentals ". State chartered banks may choose to be members and hold stock in their regional Federal Reserve bank upon meeting certain standards.

Policy Tools

Board of Governors of the Federal Reserve System. The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.

The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios specified in the Federal Reserve Board's Regulation D to an institution's reservable liabilities see table of reserve requirements.

Reservable liabilities consist of net transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities. Since December 27, , nonpersonal time deposits and Eurocurrency liabilities have had a reserve ratio of zero. The reserve ratio on net transactions accounts depends on the amount of net transactions accounts at the depository institution. This "exemption amount" is adjusted each year according to a formula specified by the act.

This "low reserve tranche" is also adjusted each year see table of low reserve tranche amounts and exemption amounts since Net transaction accounts in excess of the low reserve tranche are currently reservable at 10 percent.

For more history on the changes in reserve requirement ratios and the indexation of the exemption and low reserve tranche, see the annual review table. Additional details on reserve requirements can be found in the Reserve Maintenance Manual and in the article KB PDF in the Federal Reserve Bulletin , the appendix of which has tables of historical reserve ratios.

Total transaction accounts consists of demand deposits, automatic transfer service ATS accounts, NOW accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible bankers acceptances, and obligations issued by affiliates maturing in seven days or less. Net transaction accounts are total transaction accounts less amounts due from other depository institutions and less cash items in the process of collection.

For a more detailed description of these deposit types, see Form FR at http: The amount of net transaction accounts subject to a reserve requirement ratio of zero percent the "exemption amount" is adjusted each year by statute. The exemption amount is adjusted upward by 80 percent of the previous year's June 30 to June 30 rate of increase in total reservable liabilities at all depository institutions.

No adjustment is made in the event of a decrease in such liabilities. The amount of net transaction accounts subject to a reserve requirement ratio of 3 percent is the low reserve tranche. By statute, the upper limit of the low reserve tranche is adjusted each year by 80 percent of the previous year's June 30 to June 30 rate of increase or decrease in net transaction accounts held by all depository institutions.

The following list covers regulatory changes in reserve requirements and indexation of the low reserve tranche and the reserve requirement exemption beginning December 1, , and their effects on required reserves.

Effective with the reserve maintenance period beginning July 30, , the required reserve system was shifted from CRR to new lagged reserve requirements LRR with reserve computation periods for weekly reporters starting thirty days before the corresponding reserve maintenance periods. Under the new LRR regime, the lag in counting vault cash toward required reserves was lengthened from sixteen days to thirty days for institutions reporting weekly on the FR In other words, the average vault cash held during a reserve computation period would be applied toward required reserves in its corresponding reserve maintenance period.

Effective November 12, , the lag in counting vault cash toward required reserves was shortened from four weeks to two weeks for institutions reporting weekly on the FR, i. Effective April 2, , the 12 percent required reserve ratio against net transaction deposits above the low reserve tranche level was reduced to 10 percent.

Effective with reserve maintenance period beginning January 17, , the 3 percent reserve requirement on nontransaction liabilities was reduced to zero for FR quarterly reporters. Effective April 24, , money market deposit accounts MMDA , which had previously been subject to full reserve requirements, were made subject to the transitional phase-in program of the Monetary Control Act.

In addition, the order of application of the exemption applied to reservable liabilities was changed. Effective February 2, , Regulation D was amended as follows for institutions reporting weekly on the FR Effective July 24, , the 5 percent marginal reserve requirement on managed liabilities and the 2 percent supplementary reserve requirement against large time deposits were removed.

Effective May 29, , the marginal reserve requirement was reduced from 10 percent to 5 percent and the base upon which the marginal reserve requirement was calculated was raised. Effective March 12, , the 8 percent marginal reserve requirement was raised to 10 percent.

In addition, the base upon which the marginal reserve requirement was calculated was reduced. Effective October 11, , a marginal reserve requirement of 8 percent was imposed on "managed liabilities" of member banks, Edge Act corporations, and U.

On October 25, required reserves and reserves held by Edge Act Corporations were included in member bank reserves. Previously reserves held by these institutions were recorded as "other deposits" by Federal Reserve Banks. Effective November 30, , the 10 percent minimum requirement on the domestic deposits of Edges was removed but Edges continued to be subject to the same reserve requirements as member banks. Longer term liquidity may also be provided in exceptional circumstances.

The rate the Fed charges banks for these loans is called the discount rate officially the primary credit rate. By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates.

In its role as the central bank of the United States, the Fed serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system.

As the government's bank or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars. Just as an individual might keep an account at a bank, the U. Treasury keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled. As part of this service relationship, the Fed sells and redeems U.

It also issues the nation's coin and paper currency. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing , actually produces the nation's cash supply and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways.

Federal funds are the reserve balances also called Federal Reserve Deposits that private banks keep at their local Federal Reserve Bank. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism for private banks to lend funds to one another. This market for funds plays an important role in the Federal Reserve System as it is what inspired the name of the system and it is what is used as the basis for monetary policy. Monetary policy is put into effect partly by influencing how much interest the private banks charge each other for the lending of these funds.

Federal reserve accounts contain federal reserve credit, which can be converted into federal reserve notes. Private banks maintain their bank reserves in federal reserve accounts. The Federal Reserve regulates private banks. The system was designed out of a compromise between the competing philosophies of privatization and government regulation.

In Donald L. Kohn , vice chairman of the board of governors, summarized the history of this compromise: Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under public, rather than banker, control. But the vast majority of the nation's bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees.

The legislation that Congress ultimately adopted in reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today. The balance between private interests and government can also be seen in the structure of the system. Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the board of governors are selected by the President of the United States and confirmed by the Senate.

The GAO has authority to audit check-processing, currency storage and shipments, and some regulatory and bank examination functions, however, there are restrictions to what the GAO may audit. See Federal Reserve System Audits: The board of governors in the Federal Reserve System has a number of supervisory and regulatory responsibilities in the U.

A general description of the types of regulation and supervision involved in the U. The Board also plays a major role in the supervision and regulation of the U. It has supervisory responsibilities for state-chartered banks [46] that are members of the Federal Reserve System, bank holding companies companies that control banks , the foreign activities of member banks, the U. The Board and, under delegated authority, the Federal Reserve Banks, supervise approximately state member banks and 5, bank holding companies.

Other federal agencies also serve as the primary federal supervisors of commercial banks; the Office of the Comptroller of the Currency supervises national banks, and the Federal Deposit Insurance Corporation supervises state banks that are not members of the Federal Reserve System.

Some regulations issued by the Board apply to the entire banking industry, whereas others apply only to member banks, that is, state banks that have chosen to join the Federal Reserve System and national banks, which by law must be members of the System.

The Board also issues regulations to carry out major federal laws governing consumer credit protection , such as the Truth in Lending , Equal Credit Opportunity , and Home Mortgage Disclosure Acts. Many of these consumer protection regulations apply to various lenders outside the banking industry as well as to banks.

Members of the Board of Governors are in continual contact with other policy makers in government. They frequently testify before congressional committees on the economy, monetary policy , banking supervision and regulation , consumer credit protection , financial markets , and other matters. The Board has regular contact with members of the President's Council of Economic Advisers and other key economic officials.

The Chair also meets from time to time with the President of the United States and has regular meetings with the Secretary of the Treasury. The Chair has formal responsibilities in the international arena as well.

The board of directors of each Federal Reserve Bank District also has regulatory and supervisory responsibilities. If the board of directors of a district bank has judged that a member bank is performing or behaving poorly, it will report this to the board of governors. This policy is described in United States Code: Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information.

The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.

The Federal Reserve plays a role in the U. The twelve Federal Reserve Banks provide banking services to depository institutions and to the federal government. For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin. For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming U.

In the Depository Institutions Deregulation and Monetary Control Act of , Congress reaffirmed that the Federal Reserve should promote an efficient nationwide payments system. The act subjects all depository institutions, not just member commercial banks, to reserve requirements and grants them equal access to Reserve Bank payment services.

The Federal Reserve plays a role in the nation's retail and wholesale payments systems by providing financial services to depository institutions. The Reserve Banks' retail services include distributing currency and coin, collecting checks, and electronically transferring funds through the automated clearinghouse system. By contrast, wholesale payments are generally for large-dollar amounts and often involve a depository institution's large corporate customers or counterparties, including other financial institutions.

The Reserve Banks' wholesale services include electronically transferring funds through the Fedwire Funds Service and transferring securities issued by the U. The Federal Reserve System has a "unique structure that is both public and private" [49] and is described as " independent within the government " rather than " independent of government ". The seven-member board of governors is a federal agency. It is charged with the overseeing of the 12 District Reserve Banks and setting national monetary policy.

It also supervises and regulates the U. The chair and vice chair of the board of governors are appointed by the president from among the sitting governors.

They both serve a four-year term and they can be renominated as many times as the president chooses, until their terms on the board of governors expire.

The current members of the board of governors are as follows: Richard Clarida , a potential nominee who was a Treasury official under George W. Bush , pulled out of consideration in August []", one account of the December nominations noted. Later, on January 6, , the United States Senate confirmed Yellen's nomination to be chair of the Federal Reserve Board of Governors; she is slated to be the first woman to hold the position and will become chair on February 1, In April , Stein announced he was leaving to return to Harvard May 28 with four years remaining on his term.

At the time of the announcement, the FOMC "already is down three members as it awaits the Senate confirmation of Fischer and Lael Brainard , and as [President] Obama has yet to name a replacement for Powell is still serving as he awaits his confirmation for a second term.

Dominguez to fill the second vacancy on the board. The Senate had not yet acted on Landon's confirmation by the time of the second nomination. Daniel Tarullo submitted his resignation from the board on February 10, , effective on or around April 5, The FOMC oversees and sets policy on open market operations , the principal tool of national monetary policy. These operations affect the amount of Federal Reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions.

The FOMC must reach consensus on all decisions. The president of the Federal Reserve Bank of New York is a permanent member of the FOMC; the presidents of the other banks rotate membership at two- and three-year intervals.

All Regional Reserve Bank presidents contribute to the committee's assessment of the economy and of policy options, but only the five presidents who are then members of the FOMC vote on policy decisions. The FOMC determines its own internal organization and, by tradition, elects the chair of the board of governors as its chair and the president of the Federal Reserve Bank of New York as its vice chair.

Formal meetings typically are held eight times each year in Washington, D. Nonvoting Reserve Bank presidents also participate in Committee deliberations and discussion. The FOMC generally meets eight times a year in telephone consultations and other meetings are held when needed.

The Federal Advisory Council, composed of twelve representatives of the banking industry, advises the board on all matters within its jurisdiction. There are 12 Federal Reserve Banks, each of which is responsible for member banks located in its district.

The size of each district was set based upon the population distribution of the United States when the Federal Reserve Act was passed. The charter and organization of each Federal Reserve Bank is established by law and cannot be altered by the member banks. Member banks, do however, elect six of the nine members of the Federal Reserve Banks' boards of directors.

Each regional Bank has a president, who is the chief executive officer of their Bank. Each regional Reserve Bank's president is nominated by their Bank's board of directors, but the nomination is contingent upon approval by the board of governors. Presidents serve five-year terms and may be reappointed. Each regional Bank's board consists of nine members. Members are broken down into three classes: A, B, and C. There are three board members in each class.

Class A members are chosen by the regional Bank's shareholders, and are intended to represent member banks' interests. Member banks are divided into three categories: Each category elects one of the three class A board members.

Class B board members are also nominated by the region's member banks, but class B board members are supposed to represent the interests of the public. Lastly, class C board members are appointed by the board of governors, and are also intended to represent the interests of the public. The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.

Federal Reserve Bank of Kansas City , [76] in which the distinction is made between Federal Reserve Banks, which are federally created instrumentalities, and the board of governors, which is a federal agency. Regarding the structural relationship between the twelve Federal Reserve banks and the various commercial member banks, political science professor Michael D.

Reagan has written that: Bank ownership and election at the base are therefore devoid of substantive significance, despite the superficial appearance of private bank control that the formal arrangement creates. A member bank is a private institution and owns stock in its regional Federal Reserve Bank. All nationally chartered banks hold stock in one of the Federal Reserve Banks. State chartered banks may choose to be members and hold stock in their regional Federal Reserve bank upon meeting certain standards.

These stocks cannot be sold or traded, and member banks do not control the Federal Reserve Bank as a result of owning this stock.

An external auditor selected by the audit committee of the Federal Reserve System regularly audits the Board of Governors and the Federal Reserve Banks. These audits do not cover "most of the Fed's monetary policy actions or decisions, including discount window lending direct loans to financial institutions , open-market operations and any other transactions made under the direction of the Federal Open Market Committee" November 7, , Bloomberg L.

News brought a lawsuit against the board of governors of the Federal Reserve System to force the board to reveal the identities of firms for which it has provided guarantees during the financial crisis of — The data was released on March 31, The term " monetary policy " refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals.

What happens to money and credit affects interest rates the cost of credit and the performance of an economy. The Federal Reserve sets monetary policy by influencing the federal funds rate , which is the rate of interbank lending of excess reserves.

The rate that banks charge each other for these loans is determined in the interbank market and the Federal Reserve influences this rate through the three "tools" of monetary policy described in the Tools section below. The federal funds rate is a short-term interest rate that the FOMC focuses on, which affects the longer-term interest rates throughout the economy.

The Federal Reserve summarized its monetary policy in The Federal Reserve implements U. By conducting open market operations , imposing reserve requirements, permitting depository institutions to hold contractual clearing balances, and extending credit through its discount window facility, the Federal Reserve exercises considerable control over the demand for and supply of Federal Reserve balances and the federal funds rate.

Through its control of the federal funds rate, the Federal Reserve is able to foster financial and monetary conditions consistent with its monetary policy objectives. Effects on the quantity of reserves that banks used to make loans influence the economy. Policy actions that add reserves to the banking system encourage lending at lower interest rates thus stimulating growth in money, credit, and the economy.

Policy actions that absorb reserves work in the opposite direction. The Fed's task is to supply enough reserves to support an adequate amount of money and credit, avoiding the excesses that result in inflation and the shortages that stifle economic growth. There are three main tools of monetary policy that the Federal Reserve uses to influence the amount of reserves in private banks: The Federal Reserve System implements monetary policy largely by targeting the federal funds rate.

This is the interest rate that banks charge each other for overnight loans of federal funds , which are the reserves held by banks at the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed. The Fed therefore tries to align the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations.

The Federal Reserve System usually adjusts the federal funds rate target by 0. Open market operations allow the Federal Reserve to increase or decrease the amount of money in the banking system as necessary to balance the Federal Reserve's dual mandates.

Open market operations are done through the sale and purchase of United States Treasury security , sometimes called "Treasury bills" or more informally "T-bills" or "Treasuries". The Federal Reserve buys Treasury bills from its primary dealers. The purchase of these securities affects the federal funds rate, because primary dealers have accounts at depository institutions. The Federal Reserve education website describes open market operations as follows: Open market operations involve the buying and selling of U.

The term 'open market' means that the Fed doesn't decide on its own which securities dealers it will do business with on a particular day. Open market operations are flexible and thus, the most frequently used tool of monetary policy. Open market operations are the primary tool used to regulate the supply of bank reserves.

This tool consists of Federal Reserve purchases and sales of financial instruments, usually securities issued by the U. Treasury, Federal agencies and government-sponsored enterprises. The transactions are undertaken with primary dealers. The Fed's goal in trading the securities is to affect the federal funds rate, the rate at which banks borrow reserves from each other.

When the Fed wants to increase reserves, it buys securities and pays for them by making a deposit to the account maintained at the Fed by the primary dealer's bank. When the Fed wants to reduce reserves, it sells securities and collects from those accounts. Most days, the Fed does not want to increase or decrease reserves permanently so it usually engages in transactions reversed within a day or two.

That means that a reserve injection today could be withdrawn tomorrow morning, only to be renewed at some level several hours later. To smooth temporary or cyclical changes in the money supply, the desk engages in repurchase agreements repos with its primary dealers. Repos are essentially secured, short-term lending by the Fed. On the day of the transaction, the Fed deposits money in a primary dealer's reserve account, and receives the promised securities as collateral.

When the transaction matures, the process unwinds: The term of the repo the time between settlement and maturity can vary from 1 day called an overnight repo to 65 days. The Federal Reserve System also directly sets the "discount rate", which is the interest rate for "discount window lending", overnight loans that member banks borrow directly from the Fed. This rate is generally set at a rate close to basis points above the target federal funds rate.

The idea is to encourage banks to seek alternative funding before using the "discount rate" option. Both the discount rate and the federal funds rate influence the prime rate , which is usually about 3 percentage points higher than the federal funds rate. Another instrument of monetary policy adjustment employed by the Federal Reserve System is the fractional reserve requirement , also known as the required reserve ratio. As a response to the financial crisis of , the Federal Reserve now makes interest payments on depository institutions' required and excess reserve balances.

The payment of interest on excess reserves gives the central bank greater opportunity to address credit market conditions while maintaining the federal funds rate close to the target rate set by the FOMC. In order to address problems related to the subprime mortgage crisis and United States housing bubble , several new tools have been created. The first new tool, called the Term Auction Facility , was added on December 12, It was first announced as a temporary tool [] but there have been suggestions that this new tool may remain in place for a prolonged period of time.

The Term Auction Facility program offers term funding to depository institutions via a bi-weekly auction, for fixed amounts of credit. The Primary Dealer Credit Facility now allows eligible primary dealers to borrow at the existing Discount Rate for up to days. Some measures taken by the Federal Reserve to address this mortgage crisis have not been used since the Great Depression. As the economy has slowed in the last nine months and credit markets have become unstable, the Federal Reserve has taken a number of steps to help address the situation.

These steps have included the use of traditional monetary policy tools at the macroeconomic level as well as measures at the level of specific markets to provide additional liquidity. The Federal Reserve's response has continued to evolve since pressure on credit markets began to surface last summer, but all these measures derive from the Fed's traditional open market operations and discount window tools by extending the term of transactions, the type of collateral, or eligible borrowers.

A fourth facility, the Term Deposit Facility, was announced December 9, , and approved April 30, , with an effective date of June 4, Term deposits are intended to facilitate the implementation of monetary policy by providing a tool by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions.

Funds placed in term deposits are removed from the accounts of participating institutions for the life of the term deposit and thus drain reserve balances from the banking system. The Term Auction Facility is a program in which the Federal Reserve auctions term funds to depository institutions. Banks were not lending money to each other because there was a fear that the loans would not be paid back. Banks refused to go to the discount window because it is usually associated with the stigma of bank failure.

House of Representatives on January 17, The goal of the TAF is to reduce the incentive for banks to hoard cash and increase their willingness to provide credit to households and firms TAF auctions will continue as long as necessary to address elevated pressures in short-term funding markets, and we will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives.

The TAF is a credit facility that allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction.

By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help ensure that liquidity provisions can be disseminated efficiently even when the unsecured interbank markets are under stress.

In short, the TAF will auction term funds of approximately one-month maturity. All depository institutions that are judged to be in sound financial condition by their local Reserve Bank and that are eligible to borrow at the discount window are also eligible to participate in TAF auctions.

All TAF credit must be fully collateralized. Depositories may pledge the broad range of collateral that is accepted for other Federal Reserve lending programs to secure TAF credit. The same collateral values and margins applicable for other Federal Reserve lending programs will also apply for the TAF.

The Term Securities Lending Facility is a day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York's primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.

The resource allows dealers to switch debt that is less liquid for U. The Primary Dealer Credit Facility PDCF is an overnight loan facility that will provide funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally.

The rate is set at the lowest federal funds rate during the reserve maintenance period of an institution, less 75 bp. The Term Deposit Facility is a program through which the Federal Reserve Banks will offer interest-bearing term deposits to eligible institutions.

By removing "excess deposits" from participating banks, the overall level of reserves available for lending is reduced, which should result in increased market interest rates, acting as a brake on economic activity and inflation.

The Federal Reserve has stated that:. Term deposits will be one of several tools that the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy. The development of the TDF is a matter of prudent planning and has no implication for the near-term conduct of monetary policy.

The Federal Reserve initially authorized up to five "small-value offerings are designed to ensure the effectiveness of TDF operations and to provide eligible institutions with an opportunity to gain familiarity with term deposit procedures.

The Term Deposit Facility is essentially a tool available to reverse the efforts that have been employed to provide liquidity to the financial markets and to reduce the amount of capital available to the economy.

As stated in Bloomberg News:. Policy makers led by Chairman Ben S. The Fed is charting an eventual return to normal monetary policy, even as a weakening near-term outlook has raised the possibility it may expand its balance sheet. Bernanke, testifying before House Committee on Financial Services, described the Term Deposit Facility and other facilities to Congress in the following terms:. Most importantly, in October the Congress gave the Federal Reserve statutory authority to pay interest on balances that banks hold at the Federal Reserve Banks.

By increasing the interest rate on banks' reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates, as banks will not supply short-term funds to the money markets at rates significantly below what they can earn by holding reserves at the Federal Reserve Banks. Actual and prospective increases in short-term interest rates will be reflected in turn in higher longer-term interest rates and in tighter financial conditions more generally As an additional means of draining reserves, the Federal Reserve is also developing plans to offer to depository institutions term deposits, which are roughly analogous to certificates of deposit that the institutions offer to their customers.

A proposal describing a term deposit facility was recently published in the Federal Register, and the Federal Reserve is finalizing a revised proposal in light of the public comments that have been received. After a revised proposal is reviewed by the Board, we expect to be able to conduct test transactions this spring and to have the facility available if necessary thereafter.

The use of reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so. When these tools are used to drain reserves from the banking system, they do so by replacing bank reserves with other liabilities; the asset side and the overall size of the Federal Reserve's balance sheet remain unchanged.

If necessary, as a means of applying monetary restraint, the Federal Reserve also has the option of redeeming or selling securities. The redemption or sale of securities would have the effect of reducing the size of the Federal Reserve's balance sheet as well as further reducing the quantity of reserves in the banking system.

Restoring the size and composition of the balance sheet to a more normal configuration is a longer-term objective of our policies. In any case, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments and on our best judgments about how to meet the Federal Reserve's dual mandate of maximum employment and price stability.

In sum, in response to severe threats to our economy, the Federal Reserve created a series of special lending facilities to stabilize the financial system and encourage the resumption of private credit flows to American families and businesses. As market conditions and the economic outlook have improved, these programs have been terminated or are being phased out.

The Federal Reserve also promoted economic recovery through sharp reductions in its target for the federal funds rate and through large-scale purchases of securities. The economy continues to require the support of accommodative monetary policies. However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus.

We have full confidence that, when the time comes, we will be ready to do so. The Facility began operations on September 22, , and was closed on February 1, The action made the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms.

Fed officials said they'll buy as much of the debt as necessary to get the market functioning again. Forty-five out of 81 of the companies participating in this program were foreign firms. A little-used tool of the Federal Reserve is the quantitative policy. With that the Federal Reserve actually buys back corporate bonds and mortgage backed securities held by banks or other financial institutions. This in effect puts money back into the financial institutions and allows them to make loans and conduct normal business.

The bursting of the United States housing bubble prompted the Fed to buy mortgage-backed securities for the first time in November The first attempt at a national currency was during the American Revolutionary War. In , the Continental Congress, as well as the states, began issuing paper currency, calling the bills " Continentals ". Overprinting, as well as British counterfeiting, caused the value of the Continental to diminish quickly.

This experience with paper money led the United States to strip the power to issue Bills of Credit paper money from a draft of the new Constitution on August 16, , [] as well as banning such issuance by the various states, and limiting the states' ability to make anything but gold or silver coin legal tender on August The Second Bank of the United States was established in , and lost its authority to be the central bank of the U.

Both banks were based upon the Bank of England. This was done despite strong opposition from Thomas Jefferson and James Madison , among numerous others. The charter was for twenty years and expired in under President Madison, because Congress refused to renew it. Years later, early renewal of the bank's charter became the primary issue in the reelection of President Andrew Jackson. After Jackson, who was opposed to the central bank, was reelected, he pulled the government's funds out of the bank.

Jackson was the only President to completely pay off the debt. From to , in the Free Banking Era there was no formal central bank. From to , an Independent Treasury System ruled. From to , a system of national banks was instituted by the National Banking Act during which series of bank panics, in , , and occurred [7] [8] [9]. The main motivation for the third central banking system came from the Panic of , which caused a renewed desire among legislators, economists, and bankers for an overhaul of the monetary system.

A revision crafted during a secret meeting on Jekyll Island by Senator Aldrich and representatives of the nation's top finance and industrial groups later became the basis of the Federal Reserve Act.

The Senate voted 43—25 on December 23, Aldrich set up two commissions — one to study the American monetary system in depth and the other, headed by Aldrich himself, to study the European central banking systems and report on them. In early November , Aldrich met with five well known members of the New York banking community to devise a central banking bill. Paul Warburg , an attendee of the meeting and longtime advocate of central banking in the U.

It had several key components, including a central bank with a Washington-based headquarters and fifteen branches located throughout the U.

Aldrich believed a central banking system with no political involvement was best, but was convinced by Warburg that a plan with no public control was not politically feasible. Aldrich's bill met much opposition from politicians. Critics charged Aldrich of being biased due to his close ties to wealthy bankers such as J.

Morgan and John D. Most Republicans favored the Aldrich Plan, [] but it lacked enough support in Congress to pass because rural and western states viewed it as favoring the "eastern establishment". The primary difference between the two bills was the transfer of control of the Board of Directors called the Federal Open Market Committee in the Federal Reserve Act to the government. Key laws affecting the Federal Reserve have been: The Federal Reserve records and publishes large amounts of data.

A few websites where data is published are at the board of governors' Economic Data and Research page, [] the board of governors' statistical releases and historical data page, [] and at the St.

Some criticism involves economic data compiled by the Fed.

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