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Thursday, February 28, 2008

Learning about the Federal Reserve

I just returned to the office after a three day training course here in Washington, D.C. As part of the training course, I had the opportunity to meet Kevin Warsh, a member of the Board of Governors of the Federal Reserve System. We had two journalists as part of the training who agreed to not write about the speeches they heard, so I feel that I shouldn't blog too much about what he had to say, but after hearing him speak, I feel absolutely confident in the Board of Governors and trust that they are doing everything they can for the U.S. Economy. One of the coolest parts about the meeting was that it was held in the boardroom of the Federal Reserve. I was able to sit at the table that the Board meets at to discuss issues regarding the U.S. Economy. Maybe I'm a bit of a political geek, but it was really a cool experience. And also a very cool room.

If you really want to learn more about the Federal Reserve, there is a PDF book available on their website explaining the Purposes & Functions of the Federal Reserve. But here are some basics, taken from that document.

During the late 19th and early 20th century, there were a number of bank failures and bankrupt businesses due to financial panic and people withdrawing funds. After a severe financial crisis in 1907, Congress established the National Monetary Commission and then passed the Federal Reserve Act "to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes." This was signed into law on December 23, 1913.

The Federal Reserve System is comprised of the Board of Governors in Washington, D.C., and twelve regional Federal Reserve Banks. Federal Reserve Banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The Federal Reserve uses the federal funds rate to implement monetary policy. This is "the rate at which depository institutions trade balances at the Federal Reserve."

The Federal Reserve has a number of duties, but these can be placed into four general areas, as indicated by the above referenced document.
  1. "Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment,s table prices, and moderate long-term interest rates"
  2. "Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
  3. "Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets."
  4. "Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system."

We haven't heard much about the Federal Reserve until recent events in the market, but I'm finding the background on what they do and how they do it absolutely fascinating. The PDF of the book is definitely a worthwhile read.

1 comment:

Tom said...

The Federal Reserve is lowering interest rates in the face of rising inflation. All time high for gas, oil etc... and they are about to make it worse.

Cheap money by Greenspan caused the current housing crisis. I don't think you fight cheap money with cheap money. When the Federal Reserve prints more money by lowering interest rates, it devalues your savings.

Things of the US monetary system as a company. Each dollar is a share in that company. If they print more money it devalues your share or dollars. That is why oil and gold and food cost more.

As tough as it is, the Federal Reserve should be raising interest rates, not lowering them. Based on this, I will now need 9 million dollars to retire instead of 1 million. They are in essence rewarding spenders and punishing the savers.

So I have to disagree with your comment, I am not confident in the job the Federal Resere is doing...

But I do love your blog. Keep up the good work!