Federal Reserve Chairman Bernanke is responsible for guiding monetary policy for the U.S. economy. This was more critical through the last decade, as fiscal policy became hamstrung by a $12 trillion national debt, caused by a $500 billion annual deficit and $700 billion in military spending. As the spokesperson for the Fed, Bernanke is often seen as the country's premier economic expert, and his words can sway the stock market and the value of the dollar. For this reason, Ben Bernanke is the most important person in the U.S. and, therefore, the global economy.
Although it is the Board of the Federal Reserve that sets policy, the Chairman has traditionally taken a strong leadership role. Since the Chairman is appointed for four-year terms, he is expected to be more independent than an elected official, who answers to voters. This allows the Fed to take a long-term view, and not react to short-term political pressure. That's because the Fed's tools, such as the Fed Funds rate, act slowly over six months. The U.S. economy is like a large ship - it needs gradual direction. Stop-go monetary policy causes uncertainty, which was a major reason for the 1970s stagflation.
Purpose of establishing the FED
By 1913, America's economic growth both at home and abroad required a more flexible, yet better controlled and safer banking system. The Federal Reserve Act of 1913 established the Federal Reserve System as the central banking authority of the United States.
Under the Federal Reserve Act of 1913 and amendments over the years, the Federal Reserve System:
- Conducts America's monetary policy
- Supervises and regulates banks and protects consumers' credit rights
- Maintains the stability of America's financial system
- Provides financial services to the U.S. Government, the public, financial institutions, and foreign financial institutions
The Federal Reserve makes loans to commercial banks and is authorized to issue the Federal Reserve notes that make up America's entire supply of paper money.
Organization of the Federal Reserve System
Board of Governors
Overseeing the system, the Board of Governors of the Federal Reserve System, controls operations of the 12 Federal Reserve Banks, several monetary and consumer advisory committees and the thousands of member banks across the United States.
The Board of Governors sets minimum reserve limits (how much capital banks must have on hand) for all member banks, sets the discount rate for the 12 Federal Reserve Banks, and reviews the budgets of the 12 Federal Reserve Banks.
Do you think the Federal Reserve fulfills that purpose? Explain.
Yes. The Federal Reserve has supervisory and regulatory authority over a wide range of financial institutions and activities. It works with other federal and state supervisory authorities to ensure the safety and soundness of financial institutions, stability in the financial markets, and fair and equitable treatment of consumers in their financial transactions. As the
U.S. central bank, the Federal Reserve also has extensive and well-established relationships with the central banks and financial supervisors of other countries, which enables it to coordinate its actions with those of other countries when managing international financial crises and supervising institutions with a substantial international presence.
The Federal Reserve has responsibility for supervising and regulating the following segments of the banking industry to ensure safe and sound banking practices and compliance with banking laws:
- bank holding companies, including diversified financial holding companies formed under the Gramm-Leach-Bliley Act of 1999 and foreign banks with U.S. operations
- state-chartered banks that are members of the Federal Reserve System (state member banks)
- foreign branches of member banks
- Edge and agreement corporations, through which U.S. banking organizations may conduct international banking activities
- U.S. state-licensed branches, agencies, and representative offices of foreign banks
- nonbanking activities of foreign banks
Although the terms bank supervision and bank regulation are often used interchangeably, they actually refer to distinct, but complementary, activities. Bank supervision involves the monitoring, inspecting, and examining of banking organizations to assess their condition and their compliance with relevant laws and regulations. When a banking organization within the Federal Reserve’s supervisory jurisdiction is found to be noncompliant or to have other problems, the Federal Reserve may use its supervisory authority to take formal or informal action to have the organization correct the problems. Bank regulation entails issuing specific regulations and guidelines governing the operations, activities, and acquisitions of banking organizations.
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