SYSTEM |
PUBLICATION |
The Federal Reserve System
PURPOSES &FUNCTIONS
The Federal Reserve System
PURPOSES &FUNCTIONS
Board of Governors of the Federal Reserve System
Washington, D.C.
i
The Federal Reserve System: Purposes and Functions
First Edition, May 1939
Second Edition, November 1947
Third Edition, April 1954
Fourth Edition, February 1961
Fifth Edition, December 1963
Sixth Edition, September 1974
Seventh Edition, December 1984
Eighth Edition, December 1994
Ninth Edition, June 2005
Library of Congress Control Number 39026719
Copies of this book may be obtained from Publications
Fulfillment, Board of Governors of the Federal Reserve System,
Washington, DC 20551.
Publications Committee
Lynn S. Fox, Chair, Scott G. Alvarez, Sandra Braunstein,
Marianne M. Emerson, Jennifer J. Johnson, Karen H. Johnson,
Stephen R. Malphrus, Vincent R. Reinhart, Louise L. Roseman,
Richard Spillenkothen, and David J. Stockton
Purposes and Functions is published under the direction of the staff Publications Committee. It is assisted by the Publications Department, under the direction of Lucretia M. Boyer.
ii
Preface
This is the ninth edition of The Federal Reserve System: Purposes and Functions. It has been revised by staff members of the Federal Reserve Board to reflect the changes that have taken place in the monetary, regulatory, and other policy areas since publication of the eighth edition in 1994. It incorporates major changes in the law and in the structure of the financial system that have occurred over the past decade.
The Board’s Publications Committee had overall responsibility for the preparation of this edition. Major contributions were made by the following:
Division of Research and Statistics
Thomas D. Simpson
Division of Monetary Affairs
Cheryl L. Edwards, William R. Nelson, Seth B. Carpenter, and Selva Demiralp
Division of International Finance
Joseph E. Gagnon
Division of Banking Supervision and Regulation
Richard Spillenkothen, Virginia M. Gibbs, and Greg Feldberg
Division of Consumer and Community Affairs
Jeanne Hogarth, Adrienne Hurt, Terri Johnsen, Elizabeth Eurgubian, Yvonne Cooper, and Tracy Anderson
Division of Reserve Bank Operations and Payment Systems
Jeffrey C. Marquardt and Theresa A. Trimble
Legal Division
Kieran Fallon, Joshua H. Kaplan, Amanda Allexon, and Heatherun Allison
Office of Board Members
Rose Pianalto, Diana Lahm, Anita Bennett, and Britt Leckman
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The Federal Reserve System: Purposes and Functions
Contents
1 Overview of the Federal Reserve System .......................... |
1 |
Background ............................................................................. |
1 |
Structure of the System ......................................................... |
3 |
Board of Governors ................................................................. |
4 |
Federal Reserve Banks ............................................................ |
6 |
Federal Open Market Committee ........................................... |
11 |
Member Banks ........................................................................ |
12 |
Advisory Committees .............................................................. |
13 |
2 Monetary Policy and the Economy ..................................... |
15 |
Goals of Monetary Policy ...................................................... |
15 |
How Monetary Policy Affects the Economy ...................... |
16 |
Limitations of Monetary Policy ............................................ |
19 |
Guides to Monetary Policy .................................................... |
20 |
Monetary Aggregates .............................................................. |
21 |
Interest Rates .......................................................................... |
23 |
The Taylor Rule ...................................................................... |
23 |
Foreign Exchange Rates .......................................................... |
24 |
Conclusion ............................................................................... |
25 |
3 The Implementation of Monetary Policy ........................... |
27 |
The Market for Federal Reserve Balances ........................... |
27 |
Demand for Federal Reserve Balances ..................................... |
30 |
Supply of Federal Reserve Balances ......................................... |
32 |
Controlling the Federal Funds Rate ..................................... |
35 |
Open Market Operations ....................................................... |
36 |
Composition of the Federal Reserve’s Portfolio ....................... |
37 |
The Conduct of Open Market Operations .............................. |
37 |
A Typical Day in the Conduct of Open Market Operations .... |
40 |
Securities Lending ................................................................... |
41 |
Reserve Requirements ........................................................... |
41 |
Recent History of Reserve Requirements ............................... |
42 |
Contractual Clearing Balances ............................................. |
44 |
The Discount Window ........................................................... |
45 |
Types of Credit ........................................................................ |
46 |
Eligibility to Borrow ............................................................... |
49 |
Discount Window Collateral ................................................... |
49 |
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The Federal Reserve System: Purposes and Functions |
|
4 The Federal Reserve in the International Sphere ............. |
51 |
International Linkages ........................................................... |
51 |
Foreign Currency Operations ............................................... |
53 |
Sterilization ............................................................................. |
54 |
U.S. Foreign Currency Resources ........................................... |
55 |
International Banking ............................................................ |
57 |
5 Supervision and Regulation ................................................. |
59 |
Responsibilities of the Federal Banking Agencies ............. |
60 |
Federal Financial Institutions Examination Council ......... |
62 |
Supervisory Process ................................................................ |
62 |
Risk-Focused Supervision ....................................................... |
63 |
Supervisory Rating System ...................................................... |
63 |
Financial Regulatory Reports ................................................. |
63 |
Off-Site Monitoring ................................................................ |
64 |
Accounting Policy and Disclosure ........................................... |
64 |
Umbrella Supervision and Coordination |
|
with Other Functional Regulators ....................................... |
65 |
Anti-Money-Laundering Program .......................................... |
65 |
Business Continuity ................................................................. |
66 |
Other Supervisory Activities ................................................... |
66 |
Enforcement ............................................................................ |
66 |
Supervision of International Operations |
|
of U.S. Banking Organizations ............................................ |
67 |
Supervision of U.S. Activities |
|
of Foreign Banking Organizations ....................................... |
68 |
Supervision of Transactions with Affiliates .............................. |
69 |
Regulatory Functions ............................................................. |
70 |
Acquisitions and Mergers ......................................................... |
71 |
Other Changes in Bank Control ............................................. |
72 |
Formation and Activities of Financial Holding Companies ...... |
73 |
Capital Adequacy Standards ..................................................... |
73 |
Financial Disclosures by State Member Banks ......................... |
74 |
Securities Credit ...................................................................... |
74 |
6 Consumer and Community Affairs ...................................... |
75 |
Consumer Protection ............................................................. |
75 |
Writing and Interpreting Regulations ..................................... |
75 |
Educating Consumers about Consumer Protection Laws ......... |
76 |
Enforcing Consumer Protection Laws ..................................... |
76 |
Consumer Complaint Program ............................................... |
77 |
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Contents
Community Affairs ................................................................ |
77 |
|
Consumer Protection Laws ................................................... |
78 |
|
7 The Federal Reserve in the U.S. Payments System ........... |
83 |
|
Financial Services ................................................................... |
84 |
|
|
Retail Services ......................................................................... |
85 |
|
Wholesale Services .................................................................. |
94 |
Fiscal Agency Services ........................................................... |
97 |
|
International Services ............................................................. |
99 |
|
Federal Reserve Intraday Credit Policy ............................... |
99 |
|
Appendixes |
|
|
A |
Federal Reserve Regulations ............................................... |
103 |
B |
Glossary of Terms ................................................................ |
107 |
Index .............................................................................................. |
129 |
|
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