HGov: Functions of the Fed


Federal Reserve System

The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded. The Federal Reserve has three primary functions: financial services, supervision and regulation, and monetary policy. 

The Federal Reserve Banks provide financial services to depository institutions including banks, credit unions, and savings and loans, much like those that banks provide for their customers. These services include collecting checks, electronically transferring funds and distributing and receiving cash and coin. Federal Reserve Banks provide two types of electronic payment services; the automated clearinghouse service (ACH) and wire transfers (Fedwire). The Automated Clearinghouse (ACH) is an electronic payment network through which depository institutions send each other electronic credit and debit transfers. The Fedwire funds transfer system is a large-dollar electronic payment system owned and operated by the Federal Reserve Banks that transfers funds between financial institutions. The Federal Reserve System operates a nationwide check clearing system that processes checks, drafts and similar items. When a depository institution receives deposits of checks drawn on other institutions, it may send the checks for collection to a Federal Reserve Bank. For checks collected through the Federal Reserve Banks, the accounts of the collecting institutions are credited for the value of the checks deposited for collection and the accounts of the paying banks are debited for the value of checks presented for payment. It’s up to the Fed to make sure there is enough money in circulation. Reserve Bank offices maintain cash and coin processing operations to accept deposits and distribute cash and coin to financial institutions. When cash and coin are deposited with the Reserve Banks, notes that are suspected of being counterfeit are separated from the rest and forwarded to the Secret Service. Notes that are too worn for recirculation are destroyed using a shredding machine and their face value is deducted from the total amount of Federal Reserve notes outstanding. Each of the twelve Federal Reserve Banks is authorized by the Federal Reserve Act to issue currency. Currency must be secured by legally authorized collateral, most of which is in the form of U.S. Treasury and federal agency securities held by the Reserve Banks. The notes are designed and printed by the Bureau of Engraving and Printing of the Department of the Treasury and are delivered to the Reserve Banks for circulation. The Federal Reserve acts as a fiscal agent or bank to the federal government by providing financial services to the United States Department of Treasury and by selling and redeeming government securities such as Savings Bonds and Treasury bills. One of the core responsibilities of the Federal Reserve Banks is to serve as fiscal agent and depository for the United States government. In this role, the Reserve Banks act as the federal government’s bank and perform several services for the Treasury. These services include: maintaining accounts for U.S. Treasury, processing government checks, postal money orders and U.S. savings bonds, and collecting federal tax deposits. The Federal Reserve Banks issue, service, and redeem tens of millions of U.S. savings bonds each year on behalf of the Treasury. Savings bonds are a contract evidencing a loan made to the United States.

The Federal Reserve System supervises and regulates a wide range of financial institutions and activities. The Federal Reserve works in conjunction with other federal and state authorities to ensure that financial institutions safely manage their operations and provide fair and equitable services to consumers. Bank examiners also gather information on trends in the financial industry, which helps the Federal Reserve System meet its other responsibilities, including determining monetary policy.

The term monetary policy refers to what the Federal Reserve, the nation’s central bank, does to influence the amount of money and credit in the U.S. economy. What happens to money and credit affects interest rates (the cost of credit) and the performance of the U.S. economy. The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.


Homework:
1) Read Chapter 13 – due Monday 11/30

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