Federal Reserve Bank
The Federal Reserve Bank of New York, located at 33 Liberty Street in New York City, is the most important Federal Reserve Bank in the United States. The central banking system of the United States, the Federal Reserve Bank has twelve regional banks located in different parts of the country. The Federal Reserve Bank of New York is responsible for the Second District of the Federal Reserve System, which contains New York State, the 12 northern counties of New Jersey, Fairfield County in Connecticut, Puerto Rico and the Virgin Islands. The Federal Reserve Bank of New York also has a cash processing center in East Rutherford, New Jersey. The New York Fed's East Rutherford Operation Center processes an estimated 20 million notes a day with an average face value of $521 million.
Governed by a Board of Governors, the Federal Reserve in New York has become the center of the implementation of the nation's monetary policy. Normally a seven person panel, the Board usually convenes in Washington D.C. to discuss economic policies. The Fed of New York, the other eleven regional banks, and the Board of Governors make up the Federal Reserve System. This System was created in 1913 as a self-regulating government unit by Congress; it would then become the central banking system of the United States. The “Fed” is responsible for formulating and executing monetary policy, supervising and regulating depository institutions, providing an elastic currency, assisting the federal government's financing operations, and it serves as the banker for the federal government. Along with these responsibilities, the “Fed” also plays a crucial role in operating the nation's payment systems, protecting consumers' rights in their bank transactions, and sponsoring community expansion and reinvestment.
The Federal Reserve's action to influence the accessibility and cost of money and credit to help promote the country's economic goal of growth without inflation is monetary policy. With the passing of the Federal Reserve Act of 1913, the responsibility of dealing with monetary policy was transferred to the Federal Reserve System. This monetary policy is devised by a twelve-member group called the Federal Open Market Committee. The group is comprised of 7 Governors and 5 Reserve Bank Presidents—the NY “Fed” President is always a member. Also known as the FOMC, the group congregates in the nation's capital about eight times per year to assess the economic and financial situations of the United States. The committee also establishes the fitting position of monetary policy, and evaluates the risks to its long-run goals of price stability and sustainable economic growth.
To implement monetary policy, the Federal Reserve controls the three main tools: open market operations, the discount rate and reserve requirements. Open market operations (OMOs) are essentially the purchase and selling of US Treasuries and securities to increase the volume of money and credit in the economy; their objective is set by the FOMC and can be either a desired quantity of reserves or a desired price. The federal funds rate (the desired price) is the interest rate at which depository institutions lend Federal Reserve balances to other depository institutions overnight. This objective set by the FOMC has varied many times throughout the years it's been in place. So far in 2007, the FOMC has decreased the federal funds rate twice. They ended 2006 at a rate of 5.25% and made their first decrease in the rate (from 5.25% to 4.75%) since June 25, 2003 when the rate was bumped from 1.25% to 1.00%. The rate was decreased again another quarter of a percent to the current rate of 4.50%. The Fed sets this rate at a point it believes will forge financial and monetary conditions that are dependable with the goal of achieving its monetary policy intentions, and it adjusts that percentage in line with the changing economic developments. “Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services” (1). The Federal Reserve has various types of OMOs to choose from to implement monetary policy, but the most common of the OMOs are securities purchases and tri-party repurchase agreements. Repurchase agreements are very safe, short term loans by the Fed where they deposit money into a primary dealer's reserve as the dealer then gives collateral, usually the promised securities, to the Fed; the transaction soon becomes finalized and the collateral is returned to the dealer as it is then charged by the Fed for the principle and the interest that accumulated during the transaction. These can last for a span between one day—normally overnight—and 65 days.
The Federal Reserve counts on the FOMC to be the leading monetary policy maker. The FOMC establishes certain rates and regulations with which the responsibility for executing the monetary policy objectives is passed over to the System Open Market Account (SOMA) in the New York Federal Reserve Bank. With the responsibility of successfully executing the monetary policy set by the FOMC, the SOMA manager then also becomes responsible for “The Desk”, the Trading Desk at the NY Fed that then executes the monetary policy while acting on behalf of the Federal Reserve System. The OMOs that the Federal Reserve conducts are mostly with primary dealers that are dealers that purchase securities from the government and have established a solid trading relationship with the Fed. This relationship of the buying and selling of US securities “works because the primary dealers have accounts at clearing banks, which are depository institutions. So when the Fed sends and receives funds from the dealer's account at its clearing bank, this action adds or drains reserves to the banking system”. The Fed participates in the OMOs and the selling of specific securities with the authorized primary dealers to gain better control on the size of the money supply. Through these transactions, SOMA is actually trying to navigate the federal funds rate as closely as possible to the target rate that the FOMC has designated.
The Fed also changes the discount rate, which is the interest rate that is charged to depository institutions and commercial banks on the loans that they receive from their respective regional Federal Reserve, through three separate discount window programs to these banks and depository institutions. These are primary credit, secondary credit and seasonal credit; all three come with their own interest rate. Under these discount window programs all loans are fully secured. With the primary credit program, overnight loans are extended to banks that have a solid financial circumstance. Banks that aren't in the best financial shape can apply for secondary credit so they can fulfill a short-term need or to improve upon their financial difficulties. Seasonal credit is offered mostly to smaller depository institutions with frequent fluctuation in funding requirements, such as an agricultural society's bank. The discount rate charged for primary credit -the primary credit rate- is set above the standard level of short-term interest rates of the market. The discount rate on secondary credit is greater than the rate on primary credit. The discount rate for seasonal credit is an average of selected market rates. These discount rates are set by the board of directors of each Federal Reserve Bank; these rates are subject to the review and evaluation of the Board of Governors.
Reserve requirements are the amount of funds a depository institution must keep in its reserve as either vault cash or deposit with the Federal Reserve banks. This amount can be changed only by the Board of Governors. This dollar amount is established by applying the reserve ratios clarified in the Regulation D of the Federal Reserve Board to a depository institution's reservable liabilities. According to a table, if a bank were to net a transaction total between 0 and 9.3 million dollars, they wouldn't be liable to putting any money into their reserve. If the bank was to net a total sum between $9.3 million and $43.9 million, they would be liable to placing 3% of their liabilities into their reserve. If the bank was to total out with more than $43.9 million in transactions then 10% of their liabilities goes into their reserve. Also, all time and savings deposits for a depository institution have a 0% liability rate. All of these requirements are set to be effective on December 20th of this year.
Our national banking system was set forth in 1791 with the ratification of the 20 year charter for the 1st Bank of the United States. Before this, the nation printed bank notes called “continentals” to finance the American Revolution. Inflation began to rise mildly and then increased rapidly with the progression of the war; these notes soon became worthless. Alexander Hamilton, the US Treasurer at the time, was the man urging for it all to happen. The First Bank made the lower class agrarians feel uncomfortable with such a powerful central banking system that was dominated by big businesses. When the vote for its charter renewal arrived, the proposal was defeated by a single vote; the idea of a central banking system was swept underneath the rug until 1816 when a proposal for another 20 year charter for the Second Bank of the United States was passed. This seemed to be the right answer for the nation until a prominent enemy of the central bank named Andrew Jackson was elected President in 1828. Jackson vowed to kill the Bank and preached against its actions to Americans. Since he was preaching to the majority party of the nation—lower class farmers—this touched a nerve with the nation's ideology as a whole and the charter wasn't renewed in 1836. Between 1836 and 1865, the nation underwent a “free banking era” where states had their own chartered banks and other unchartered banks all issued their own notes which were backed up in gold. Meanwhile, in 1863, Congress passed the National Banking Act which would provide nationally charted banks that would circulate notes in the economy that were backed by US government securities issued by the treasury or federal agencies. Soon an amendment was passed to require tax on state chartered bank notes, but not on nationally chartered bank notes; this then created a uniform currency across the nation. However, between 1873 and 1907, financial panics plagued the economy throughout the country. The worst financial depression in our nation's short-lived history occurred in 1893 because of a banking panic, and it was only until financial mogul J.P. Morgan essentially paid the economy out of the panic; this was a sign that our banking system severely needed to be altered. Finally, by 1907, there seemed to a consensus that a central banking system was needed to guarantee a panic-free banking system and provide for an elastic currency. In 1908, the National Monetary Commission was established through the Aldrich Vreeland Act in order to discover how to be a more efficient banking nation by studying the European banks. The reports filed by the Commission then became the basis for the foundation of the Federal Reserve Act of 1913 that was signed by President Woodrow Wilson on December 23, 1913. The Act stood as the epitome of a compromise; the Federal Reserve banking system was to be a decentralized bank that balanced the competing interests of private banks and populist sentiment. The Federal Reserve System was created to regulate credit, to manage government money, to improve bank supervision, to provide for an elastic money supply and to be a lender of last resort.
The Federal Reserve has a third responsibility as a fiscal agent for the United States Treasury. This means that the Fed is a “bank that handles the fiscal”, which means anything pertaining to money, such as government taxation and its spending policies, “matters for a corporation, including disbursement of dividend payment funds, redeeming bonds and coupons at maturity, and handling taxes related to the issuance of bonds”(2). By being a fiscal agent for the Treasury, the Federal Reserve has numerous responsibilities. The Fed has to maintain and secure all of the accounts in the Reserve for the Treasury. While this happens, the Fed also issues checks and clears them for the U.S. Treasury. Collecting citizens' tax deposits is another responsibility of the Fed, as well as conducting auctions for the Treasury to sell US securities. The Federal Reserve banks can also issue, transfer, redeem and pay interest on all US securities for the government. The Fed, specifically the Federal Reserve Bank of New York, will occasionally get involved in foreign exchange markets to achieve dollar exchange rate aspirations.
The Federal Reserve Bank also functions as a bank for other banks. It oversees and operates electronic cash payment systems. The two main electronic payment systems for the Fed are the Fed Automated Clearinghouse (FedACH) and FedWire. Created in the early 1970s, FedACH has the ability to transfer funds such as direct deposit payroll payments. FedACH also successfully operated through approximately 2.6 billion transactions in 2006 with a total worth of around $11.8 trillion. FedWire, another electronic payment system, has actually evolved from being a private telegraph system that was started in 1918. FedWire deals with transactions such as the transference of funds and securities such as federal funds purchases. It's been recorded that as of March of 2007, FedWire averaged a procession of about $4 trillion each day.
Bank supervision is one of the main tasks of the Fed as well. The Federal Reserve has to come up with binding regulations for the banking industry based on U.S. and international banking and fair competition laws.
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