Federal Reserve Act 1913 created the Federal Reserve System.Structure of the Federal Reserve System-Member banksAll national banks must joinOptional for state banksAll banks are subject to Fed reserve requirements whether a member or notAll banks can use the check-clearing function of the Fed and can obtain discount loans from the FedBanks become members of the Fed by purchasing stock in the Federal Reserve Bank in their district. Fixed dividends are paid on this stock-Federal Reserve BanksThe US is divided into 12 geographic regions with a Federal Reserve Bank ineach region. Each bank may have several branches located throughout theregion.-Functions of the Federal Reserve BanksClear checksIssue new currency and withdraw damaged currency from circulationMake discount loansEvaluate proposed mergers and applications for banks to expand their activitiesLiaison between business community and the Fed SystemExamine bank holding companies and state-chartered member banksCollect data on local business conditionsResearch topics related to monetary policy-The 12 banks and monetary policy“establish” the discount rateDecide which banks will receive discount loansSelect one commercial banker to serve on the Federal Advisory CouncilFive of the twelve bank presidents vote on the FOMC-Board of GovernorsSeven members each from a different geographic region in the USEach member serves one nonrenewable14-year term and can also be appointedto complete a term for another memberTerms expire every two yearsMembers are appointed by the President of the U.S. and confirmed by the U.S. SenateOne of the seven members is appointed to serve a four-year term as Chair. Can be reappointed to this position-Duties of the Board of GovernorsVote on FOMC decisionsSet the reserve requirements“Effectively” set the discount rateRepresent the U.S. in economic mattersSet margin requirementsSet the salaries for Fed bank officersApprove bank mergers and specify permissible activities of bank holdingcompaniesResearch topics related to monetary policyFederal Open Market Committee (FOMC)Twelve voting members – seven Board of Governors plus five of the Fed bank presidents. The president of the New York Fed always votes and the remaining4 voting members rotate amongst the other 11 regions.FOMC members meet about every 6 weeks and set monetary policy for the U.S.The chair of the Board of Governors is the chair of the FOMCDecisions of the FOMC are sent to the Open Market Desk at the New York Fed which carries out the necessary transactionsIndependence of the FedFactors making the Fed independent-members serve long terms-Fed is financially independentFactors making the Fed dependent-Fed was created by an act of Congress and can be changed by Congress-The President appoints the Board members and can influence legislationThe Federal Reserve is overall quite independentShould the Fed be Independent?Yes, reasons why:-Can pursue longer run objectives-Avoids the political business cycle-Less likely that budget deficits will be inflationaryNo, concerns:-Undemocratic-Hinders coordination of monetary and fiscal policy-Fed has not always done a good
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