The Federal Reserve and Its Functions

The Federal Reserve System works in a pyramid type of fashion where those at the top make the decisions for those who are below them and those banks make decisions for the banks below them. The Federal Reserve is located in Washington DC and is run by seven members who were appointed for staggered fourteen year terms by the president of the United States with the advice and consent of the Senate. The members can only serve for one-year term and they are all staggered positions so that a President cannot hire a full board and the board members are protected from day to day-political pressures. These individuals act as the main spokesperson for monetary policy for the country.

Under the Board of Governors are the twelve district reserve banks. These banks are located in every district in the United States. These banks monitor and report on economic and banking conditions in its district. These banks are set up so that not one bank can exploit the central banks power at another's expense. To regulate these banks congress only aloud nine members on there board. This helped to make sure that all the interests of the groups were represented equally.

Under the reserve banks are the member banks that you can find on almost every street corner. All of these banks have equal access to Fed services like check clearing and reserve loans. About four thousand member banks must first contribute a small amount of money to join the system but in return they receive stocks in the system. These stocks that they received earn them a dividend of about six percent from the Fed. The all seeing eye of these banks are the Federal Advisory Council. This council collects information about each district and reports to the board of Governors about economic conditions within their district-twelve members in all. The main goal of this advisory group is to provide feedback and advice to the Board of Governors concerning the overall financial health of each district. Because these banks are independently owned it gives the Fed the power to make changes that will better suit and help the American Economy overall.

A key group that makes big decisions that affect the banks are the Federal Open Market Committee. The (FOMC) makes key decisions about interest rates and the growth of the United States money supply. When this group meets they discuss in private about the cost and availability of credit, for business and consumers, across he country. The decisions that they make can affect the financial markets, the rates for home mortgages, and many other economic institutions around the world.

The Fed serves the government by handling al of the money that they make from taxation and transfer payments through programs such as Medicare and Social security. Its first job for the United States government is serving as the banker for all of the money they collect in a year. The Fed maintains a checking account for the treasury department. The Fed processes payments such as social security checks, IRS refunds, and other government payments. The Federal Reserve also serves as a financial agent for the Treasury Departments and other government agencies. The Fed sells, transfers, and redeems government bonds, bills and notes, or securities. The Treasury Department periodically auctions off government bills, bonds, and notes to finance the government's activities. These funds that are raised from these auctions are automatically deposited not the Federal Reserve Bank of New York. One of the most important things that the Fed does for our economy and for the U.S. government is issuing currency. Under the Federal Reserve System only the federal government can issue currency. The department of the Treasury issues coins minted at the United States Mint. As bills become worn and torn the Federal Reserve takes them out of circulation and replaces them with fresh ones.

The other huge job of the Fed is to also provide services to banks through out the nation. Its most visible function is in its check-clearing services. Check clearing is the process by which banks record hose account gives up money and whose account receives money when a customer writes a check. The Fed can clear millions of checks at one time and can do it within two days. To ensure the stability in the banking system the Fed monitors bank reserves throughout the system. Each of the twelve Federal Reserve banks sends out bank examiners to check up on lending and other financial activities of member banks. The fed also studies proposed bank mergers and bank holding company charters to ensure competition in the banking financial industries. The Federal Reserve also protects consumers by enforcing truth-in-lending laws, which require sellers to provide full and accurate information about loan terms. Under regular normal circumstances, banks lend each other money on a day-to-day basis, using money from their reserve balances. These funds are called federal funds. The interest rate that banks charge each other for these loans in the federal funds rate. Banks can also borrow money from the Fed if they do not have enough money to give out as a loan. When these loans are made out to the banks the Fed also charges the banks for these loans, which are called the discount rate.