The Federal Reserve

     Our Federal Reserve System is also referred to as the Federal Reserve or Fed, and is one of the most confusing and misunderstood things about our federal government.  Some things are almost unbelievable.  Do we need to make some changes?

     The Federal Reserve Act was passed on December 23, 1913 creating the Federal Reserve.  It was rushed through Congress when many Representatives and Senators were gone for the holidays.  Woodrow Wilson was President.  Why does this not surprise me?

     The Federal Reserve was to act as the central banking system for the country, government, and private banks with the objective of providing financial stability for the country.  This action was prompted by several financial panics including a severe one in 1907.  The Act specifically stated three objectives.  They were: maximum employment, stabilize prices, and moderate long-term interest rates.  The Fed clearly did not achieve its objective and changes were made after the Great Depression.  The powers of the Fed have continually been expanded including the power to regulate banking institutions.  The Federal Reserve is a compromise between a government agency and a private corporation.

     The Federal Reserve structure is a Board of Governors, a Federal Open Market committee (FOMC), and twelve regional Federal Reserve Banks.  The Board of Governors consists of seven Commissioners appointed by the President and confirmed by the Senate.  The FOMC is made up of the seven Board of Governor Commissioners and the twelve regional bank presidents.  Only five of the regional bank presidents hold a vote.  The New York Fed President always has a vote.  The other four votes rotate among the other eleven regional bank presidents with one-year terms. 

The face of the Federal Reserve is the Board of Governors Chairman.  The current chairman is Janet Yellen.

      As the central bank for the country, the Federal Reserve loans money to the government, the twelve regional banks, and other organizations like Fannie Mae and Freddie Mac.  The Fed also makes loans to prevent catastrophic bankruptcies.  The interest rate charged by the Federal Reserve is normally referred to as the Prime Rate. 

     The government has given the Federal Reserve the authority to expand or contract the nation’s money supply.  They can print money.  Actually the paper currency and coins are produced by the U.S. Treasury Department and sold to the Federal Reserve.  The price for all paper currency is the actual manufacturing cost and coins are sold at face value.  

     The twelve Federal Reserve banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.  There are also 24 Federal Reserve branch banks.  All profits of the Federal Reserve are transferred to the U.S. Treasury after a statutory dividend of 6% is paid on member banks’ capital investment. 

     The Federal Reserve does make an annual report to the House of Representatives and is subject to audit by the U.S. Government Accountability Office, but is not regulated by or required to file a report with the Securities and Exchange Commission (SEC).  Federal Reserve capital investors are not public knowledge.  The Federal Reserve plays a huge role in the economic well being of this country and some people feel it should be more transparent and/or be subject to regulation by the SEC.   

      The Federal Reserve should not be confused with the Federal Home Loan Banks, which also have twelve banks located in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, Seattle, and Topeka.  Federal Home Loan Banks (FHLBanks) make loans to their member institutions to support housing and economic development and are owned by their members.  Unlike Fannie Mae and Freddie Mac, the Federal Home Loan Banks’ business is self-capitalizing in nature, requiring that their members invest in the capital stock of the FHLBanks based on a percentage of outstanding indebtedness to any particular member.  Moreover, the stock of the FHLBanks is not publicly traded, and therefore the FHLBanks are not subject to the same earnings pressures that in part led to the conservatorships of Fannie and Freddie.