TheFederal Reserve System (Fed) is the United States central bank formed in 1913 that aims "to provide the nation with a safer, more flexible, and more stable monetary and financial system."^[1] The Federal Reserve System is structured as anindependent federal agency that operates outside of the executive branch with oversight from Congress.^[2] The current Federal Reserve chair isJerome Powell, who wasconfirmed by theSenate on January 23, 2018.^[3] The position comes with a four-year term. Powell was re-appointed to a second term on May 23, 2022.^[4]

History

Administrative State
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Early central banks

Three central banks existed in the United States before the Federal Reserve came into existence. The First Bank of the United States was established in 1791 in large part because of Alexander Hamilton, but after its initial 20 year charter, Congress voted against renewal. The War of 1812 then caused issues with the security of banking and credit leading to a second attempt at a central bank. The Second Bank of the United States was formed in 1816. Citizens were skeptical of the power of both of the first two central banks, and once again, the bank's charter was not renewed after 20 years. The National Banking Act of 1863 provided federal banking oversight by creating the Office of the Comptroller of the Currency. The depression in 1893, however, caused uncertainty in the sustained strength of the economy.^[5]

Fed's formation

President Woodrow Wilson signed the Federal Reserve Act into law on December 23, 1913, following a series of bank failures and financial panics. The idea for the Federal Reserve System came from ideas proposed by the National Monetary System after the Panic of 1907. The Federal Reserve Banks were all open by November 16, 1914.^[6] Throughout World War I, the Federal Reserve was able to aid in supporting the war effort in Europe before helping the U.S. fund its entry into the war. Following the war, New York Fed President Benjamin Strong began using open market operations to influence credit by purchasing a large amount of government securities. This strategy was then followed by the entire Federal Reserve System as well as the Bank of England, among other central banks.^[6]

Reforms

In 1929 the stock market crashed, beginning the Great Depression as banks began to fail. The Glass-Steagall Act, passed in 1933, separated commercial and investment banking and established the Federal Deposit Insurance Corporation (FDIC). The Banking Act of 1935 formed the Federal Open Market Committee as part of the Federal Reserve System and removed the Treasury Secretary from the Federal Reserve's Board of Governors. The Treasury-Fed Accord was struck in 1951 after a debate between the Federal Reserve and the Truman administration over control of interest rates. The independence of the Federal Reserve was solidified by the Accord as it "eliminated the obligation of the Fed to monetize the debt of the Treasury at a fixed rate."^[6] In 1978, the Humphrey-Hawkins Act required the chair of the Federal Reserve to testify beforeCongress twice a year.^[6]

Modern banking period

Following a period of high inflation during the 1970s, the Monetary Control Act of 1980 forced the Federal Reserve to keep financial services' prices competitive with private businesses and to set reserve requirements for financial institutions, marking a move into the modern banking reforms. The 1990s saw the largest economic expansion in U.S. history. In 1999, the Gramm-Leach-Bliley Act overturned part of the Glass-Steagall Act, allowing commercial, insurance and investment activities to be provided by the same institution. The Fed reacted briefly to the September 11, 2001, terrorist attacks in order to stabilize markets.^[6]

Financial crisis

Low mortgage rates in the early 2000s created a financial bubble in the housing market with home ownership possible for more people, and riskier mortgages were securitized, which allowed people with poor credit to purchase houses they couldn't afford. The temporary increase in demand increased the price of houses, until 2006, when prices began to fall sharply. Homeowners began to owe more on their houses than the houses were worth and owners began to default on their mortgages. In late 2008, financial institutions Lehman Brothers and Washington Mutual failed. In reaction to that, the Federal Reserve made loans to JP Morgan Chase and American International Group (AIG). After looking into the 19 largest banks in the U.S. in 2009, it was determined that banks without enough money to protect themselves from loan losses needed to either accept money from the Troubled Asset Relief Fund or raise capital from the private sector. The federal funds rate was taken to the lowest it had been in 50 years and as a further measure, the Federal Reserve engaged in large-scale asset purchases, including the $1.25 trillion authorization for the federal government to purchase mortgage-backed securities from Freddie Mac and Fannie Mae.^[7]

Structure

Mission

The Federal Reserve's original mission statement was as follows:

According to the Federal Reserve's website, the bank's duties include the following:

Leadership

The chair of the Board of Governors is the leader of the Federal Reserve System.Jerome Powell was sworn into the position in 2018. The chair oversees the Federal Open Market Committee, testifies before theUnited States Senate twice a year (on or around February 20 and July 20), and meets with the president andsecretary of the Treasury regularly. Internationally, the chair is an alternate member of the International Monetary Fund Board of Governors and a member of the U.S. delegation to the Group of Seven (G7) among participation in other international organizations.^[10]

Board of Governors

A seven member Board of Governors is appointed by the president andconfirmed by theSenate to 14 year terms. The long terms were formed with the intention of isolating the Board from short term political pressure.^[11] Members of the Board analyze domestic and international economic developments, supervise the Federal Reserve Banks, play a role in the federal government's payment system and administer consumer credit protection laws. The Board oversees 900 state member banks and 5,000 bank holding companies.^[10]

Reserve Banks

There are 12 Federal Reserve Banks broken into Federal Reserve Districts and 24 additional branch banks in the United States. The Reserve Banks help set monetary policy, bring money into and remove money from circulation, provide theTreasury Department with checking accounts and oversee member banks. The Federal Reserve Banks and their Districts are as follows:^[12]

Federal Reserve Districts

Federal Open Market Committee

The Federal Open Market Committee, consisting of 12 voting members, holds eight meetings annually to determine monetary policy. Five rotating Reserve Bank presidents and seven members of the Board of Governors are the voting members presided over by the chair of the Board of Governors. All 12 District presidents are present for the meetings, and the New York District president is vice chair of the Committee as the New York Reserve Bank carries out the policies enacted. Voting presidents hold a one year term before the Committee rotates in presidents from other districts.^[11] A vote is made on policies during the final day of each meeting to determine policies, and they are recorded in theSummary of Commentary on Current Economic Conditions by Federal Reserve District, commonly referred to as theBeige Book.^[12][11]

Monetary policy

Guides

In order to determine whether the changes agreed to by the Federal Open Market Committee are achieving the intended goals, certain guides are used in an attempt to track changes in the economy. According to the Federal Reserve, the most frequently mentioned guides to monetary policy are:

• Monetary aggregates
• Interest rates
• The Taylor Rule
• Foreign exchange rates

While each guide has advantages, none are certain indicators of the impacts of monetary policies on the economy. This causes policy makers to employ many different indicators to determine whether changes in policy are meeting their intended goals and if not, what changes can be made.

Implementation

Federal funds rate

The Federal Reserve controls the federal funds rate, the rate that member banks trade surplus and deficit balances with each other. It controls the rate in four ways to implement monetary policy:

Unconventional policy

When the federal funds rate is dropped as low as it can go and the Federal Reserve determines more action is necessary, unconventional policies are used to ease rates. The three general areas of unconventional policy include "increasing the size of the Fed’s balance sheet; altering the composition of its balance sheet; and providing increasingly detailed guidance about the likely future path of policy."^[13] Expanding the Federal Reserve's balance sheet includes large-scale asset purchases, or quantitative easing, which was used at the end of the Bush administration and throughout theObama administration in an attempt to lower market interest rates.

Recent news

This section links to a Google news search for the termFederal + Reserve + Board + Governors

External links

Footnotes

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United States Terms Adjudication (administrative state) •Administrative judge •Administrative law •Administrative law judge •Administrative state •Arbitrary-or-capricious test •Auer deference •Barrier to entry •Bootleggers and Baptists •Chevron deference (doctrine) •Civil servant •Civil service •Code of Federal Regulations •Codify (administrative state) •Comment period •Compliance costs •Congressional Record •Coordination (administrative state) •Deference (administrative state) •Direct and indirect costs (administrative state) •Enabling statute •Ex parte communication (administrative state) •Executive agency •Federal law •Federal Register •Federalism •Final rule •Formal rulemaking •Formalism (law) •Functionalism (law) •Guidance (administrative state) •Hybrid rulemaking •Incorporation by reference •Independent federal agency •Informal rulemaking •Joint resolution of disapproval (administrative state) •Major rule •Negotiated rulemaking •Nondelegation doctrine •OIRA prompt letter •Organic statute •Pragmatism (law) •Precautionary principle •Promulgate •Proposed rule •Publication rulemaking •Regulatory budget •Regulatory capture •Regulatory dark matter •Regulatory impact analysis •Regulatory policy officer •Regulatory reform officer •Regulatory review •Rent seeking •Retrospective regulatory review •Risk assessment (administrative state) •Rulemaking •Separation of powers •Significant regulatory action •Skidmore deference •Statutory authority •Substantive law and procedural law •Sue and settle •Sunset provision •Unified Agenda of Federal Regulatory and Deregulatory Actions •United States Code •United States Statutes at Large Bibliography "Administrative Law - The 20th Century Bequeaths an 'Illegitimate Exotic' in Full and Terrifying Flower" by Stephen P. Dresch (2000) "Confronting the Administrative Threat" by Philip Hamburger and Tony Mills (2017) "Constitutionalism after the New Deal" by Cass R. Sunstein (1987) Federalist No. 23 by Alexander Hamilton (1787) "From Administrative State to Constitutional Government" by Joseph Postell (2012) "Interring the Nondelegation Doctrine" by Eric A. Posner and Adrian Vermeule (2002) "Rulemaking as Legislating" by Kathryn Watts (2015) "The Checks & Balances of the Regulatory State" by Paul R. Verkuil (2016) "The Myth of the Nondelegation Doctrine" by Keith E. Whittington and Jason Iuliano (2017) "The Progressive Origins of the Administrative State: Wilson, Goodnow, and Landis" by Ronald J. Pestritto (2007) "The Rise and Rise of the Administrative State" by Gary Lawson (1994) "The Study of Administration" by Woodrow Wilson (1887) "The Threat to Liberty" by Steven F. Hayward (2017) "Why the Modern Administrative State Is Inconsistent with the Rule of Law" by Richard A. Epstein (2008) Agencies Administrative Conference of the United States •United States Civil Service Commission •U.S. Government Accountability Office •U.S. Office of Information and Regulatory Affairs •U.S. Office of Management and Budget