May meeting: The Federal Reserve

On May 20, Deb Bloomberg from the Federal Reserve Bank of Boston returned to give us an timely overview of  “The Federal Reserve and Monetary Policy,” explaining the Fed’s goals, structure, and functions, with an emphasis on recent monetary policy actions.

Deb first outlined the history and structure of the Federal Reserve, which was created in 1913 when–following the panic of 1907–Congress decided we needed a central bank.  Most of the Federal Reserve Banks are in the eastern U.S., reflecting the population and politics of the early 1900’s; if created today, this structure would probably look very different.

The Fed consists of a Board of Governors (7 members, appointed by the President and confirmed by the Senate), the Federal Reserve Banks, and straddling those two, the Fed’s Open Market Committee (12 voting members, including the Board of Governors, the president of the Federal Reserve Bank of New York, and four other Federal Reserve Bank presidents in rotating one-year terms).  The Federal Open Market Committee (FOMC) typically meets eight times a year in Washington, DC, and issues press releases stating the Fed’s target for the Federal Funds Rate (FFR), the rate of interest banks charge each other on overnight loans.  The FFR affects the prime rate, the discount rate (when banks borrow from the Fed), and then gradually filters down through the rest of the nation’s economy.  Meeting minutes, statements and other information about the FOMC is available online.

Deb outlined the major goals of monetary policy:  Long-term price stability (with small annual increases in inflation) and sustainable economic growth.  The Fed uses three main tools:

1. Open Market Operations: buying and selling government securities on the secondary market to “primary dealers” to reach the target Federal Funds Rate (FFR), purchasing securities if the economy is weak, and selling them if inflation is a threat.
2. Reserve requirements for banks: the percentage of deposits banks cannot lend or invest.
3. Loans from the Fed, as a “lender of last resort.”  These loans can be primary (usually overnight, at the discount rate), secondary (short-terms, with a higher interest rate), or seasonal.
   

Deb then discussed some examples of liquidity measures authorized for the Fed, including Term Auction Facility (TAF) (auctioning term funds to depository institutions), Term Securities Lending Facility (TSLF) (banks can borrow U.S. Treasury securities for 28 days and offer mortgage-backed securities and the like as collateral), Term-Asset-Backed Securities Loan Facility (TALF–a new program), and Commercial Paper Funding Facility.  More information about all of these measures is available on the Fed’s Monetary Policy webpage, under “Policy Tools.”

For more on these topics, the Library has many books in its collection about the Federal Reserve and monetary policy.  The websites for the Federal Reserve and the Federal Reserve Bank of New York also have a wealth of information, including a complete book available for download, The Federal Reserve System: Purposes & Functions, and an interactive journey through the Fed called Fed101.

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