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1 1 (January 6, 2020)

handle is hein.crs/govbcwv0001 and id is 1 raw text is: 01; F ie sea.rch & Updated January 6, 2020 Introduction to Financial Services: The Federal Reserve The Federal Reserve Act (12 U.S.C. 221 et seq.) created the Federal Reserved (Fed) as the nation's central bank in 1913. The Fed is composed of 12 regional Federal Reserve banks overseen by a Board of Governors in Washington, DC. Figure 1 illustrates the city in which each bank is headquartered and the area of each bank's jurisdiction. The board is composed of seven governors nominated by the President and confirmed by the Senate. The President selects (and the Senate confirms) a chair and two vice chairs from among the governors; one vice chair is responsible for supervision. The governors serve nonrenewable 14-year terms, but the chair and vice chairs serve renewable 4-year terms. Jerome Powell's term as chair began February 5, 2018. Board members are chosen without regard to political affiliation. Regional bank presidents are chosen by their boards, not by the President, with the approval of the Board of Governors. Figure I. Federal Reserve Districts Source: Federal Reserve. In general, policy is formulated by the board and carried out by the regional banks. Monetary policy decisions, however, are made by the Federal Open Market Committee (FOMC), which is composed of the seven governors, the president of the New York Fed, and four other regional bank presidents. Representation for these four seats rotates among the other 11 regional banks. The FOMC meets at least every six weeks to review the stance of monetary policy. The Fed's budget is not subject to congressional appropriations or authorizations. The Fed is funded by fees and the income generated by securities it owns. Its income exceeds its expenses, and it remits most of its net income to the Treasury, where it is used to reduce the federal debt. The Fed's capital consists of stock and a surplus. The Fed's surplus is capped at $6.825 billion by law. Private banks regulated by the Fed buy stock in the Fed to become member banks. Membership is mandatory for national banks, but optional for state banks. The stock pays dividends of 6% for banks with less than $10 billion in assets and the lower of 6% or the 10-year Treasury yield for banks with more than $10 billion in assets. Stockholders choose two-thirds of the board at the regional Fed banks. .... the F - , s.k The Fed's responsibilities fall into four main categories: monetary policy, lender of last resort, prudential supervision of certain banks and other financial firms, and provision and oversight of payment systems. Monetary Policy. The Fed's primary monetary policy instrument is the federal funds rate (the overnight bank lending rate). The Fed influences interest rates to affect interest-sensitive spending on capital investment, consumer durables, and housing. Interest rates also indirectly influence the value of the dollar and, therefore, spending on exports and imports. The Fed reduces rates to stimulate economic activity and raises rates to slow activity. Monetary policy is considered a blunt instrument that cannot be targeted to affect specific regions, certain industries, or the income distribution. The Fed targets the federal funds rate through open market operations-the purchase and sale of U.S. Treasury securities, mainly from primary dealers (who specialize in trading government securities), in the secondary market. Often, these transactions are made on a temporary basis using repurchase agreements, known as repos. The Fed sets reserve requirements and the interest rate it pays banks to hold reserves. In addition, monetary policy can involve foreign exchange operations, although these are rare. Open market and foreign exchange operations are conducted by the New York Fed per the FOMC's directives. The Fed influences the money supply through its control over bank reserves and currency in circulation. During the 2007-2009 financial crisis, the Fed reduced the federal funds rate to zero and conducted large-scale asset purchases of Treasury- and mortgage-backed securities from 2008 to 2014 known as quantitative easing-that increased the size of its balance sheet. The Fed then began to normalize monetary policy. From 2015 to 2018, the Fed initiated a series of increases in the federal funds rate. From 2017 to 2019, the Fed gradually reduced the size of its balance sheet. However, an economic slowdown in 2019 prompted the Fed to cut rates and repo market instability prompted the Fed to begin expanding its balance sheet again in October. A large balance sheet has boosted the Fed's remittances to the Treasury in recent years. Lender of Last Resort. Despite their name, Federal Reserve banks do not carry out any banking activities, with one limited exception. The Fed traditionally acts as lender of last resort by making short-term, collateralized loans to K~:> gognpo goo , q g 'S a X

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