View source for Federal Reserve

{{Use mdy dates|date=August 2012}}
{{Redirect4|FRB|FED}}
{{Infobox Central bank
|bank_name_in_local =
|image_1        = US-FederalReserveSystem-Seal.svg
|image_title_1  = Seal
|image_2        = Marriner S. Eccles Federal Reserve Board Building.jpg
|image_title_2  = Federal Reserve System headquarters ([[Eccles Building]])
|headquarters   = [[Washington, D.C.]]
|established    = {{Start date and years ago|1913|12|23}}
|president      = [[Ben Bernanke]]
|leader_title   = [[Chairman of the Federal Reserve|Chairman]]
|president2     = [[Janet Yellen]]
|leader_title2  = [[Vice Chairman of the Federal Reserve|Vice Chairman]]
|bank_of        = [[United States]]
|currency       = [[United States dollar]]
|currency_iso   = USD
|borrowing_rate = 0%–0.25%<ref>{{cite web|url=http://www.federalreserve.gov/fomc/fundsrate.htm |title=Open Market Operations |publisher=Federal Reserve |date= |accessdate=August 29, 2011}}</ref>
|website        = [http://www.federalreserve.gov/ federalreserve.gov]
|footnotes      =
}}
{{Public finance}}
{{Banking in the United States}}

The '''Federal Reserve System''' (also known as the '''Federal Reserve''', and informally as the '''Fed''') is the [[central bank]]ing system of the United States. It was created on December 23, 1913, with the enactment of the [[Federal Reserve Act]], largely in response to a series of financial panics, particularly a severe [[Panic of 1907|panic in 1907]].<ref name="mnglass"/><ref name="initial"/><ref>{{harvnb|BoG|2005|pp=1–2}}</ref><ref name=FDS-H-04/><ref name=FDS-H-05/><ref name=FDS-H-06/> Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved.<ref name="initial"/><ref>{{harvnb|BoG|2005|pp=1}} "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."</ref>  Events such as the [[Great Depression]] were major factors leading to changes in the system.<ref>{{cite book|title=Reform of the Federal Reserve System in the Early 1930s: The Politics of Money and Banking |first=Sue C. |last=Patrick |publisher=Garland |year=1993 |isbn=978-0-8153-0970-3 }}</ref>

The Congress established three key objectives for monetary policy—maximum employment, stable prices, and moderate long-term interest rates—in the Federal Reserve Act.<ref>{{usc|12|225a}}</ref> The first two objectives are sometimes referred to as the Federal Reserve's dual mandate.<ref>{{cite web|url=http://www.federalreserve.gov/faqs/money_12848.htm |title=The Congress established two key objectives for monetary policy-maximum employment and stable prices-in the Federal Reserve Act. These objectives are sometimes referred to as the Federal Reserve's dual mandate |publisher=Federalreserve.gov |date=January 25, 2012 |accessdate=April 30, 2012}}</ref> Its duties have expanded over the years, and today, according to official Federal Reserve documentation, include conducting the nation's [[monetary policy]], supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to [[depository institution]]s, the U.S. government, and foreign official institutions.<ref name="mission">{{cite web|url=http://www.federalreserve.gov/generalinfo/mission/default.htm |title=FRB: Mission |publisher=Federalreserve.gov |date=November 6, 2009 |accessdate=October 29, 2011}}</ref> The Fed also conducts research into the economy and releases numerous publications, such as the [[Beige Book]].

The Federal Reserve System's structure is composed of the presidentially appointed [[Federal Reserve Board of Governors|Board of Governors]] (or Federal Reserve Board), the [[Federal Open Market Committee]] (FOMC), twelve regional [[Federal Reserve Bank]]s located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils.<ref>{{harvnb|BoG|2005|pp=v}} (See [[#Structure|structure]])</ref><ref>{{cite web|url=http://www.federalreserveonline.org/ |title=Federal Reserve Districs |publisher=Federal Reserve Online |date= |accessdate=August 29, 2011}}</ref><ref>Advisory Councils – http://www.federalreserve.gov/aboutthefed/advisorydefault.htm</ref> The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time. The Federal Reserve System has both private and public components, and was designed to serve the interests of both the general public and private bankers. The result is a structure that is considered unique among central banks. It is also unusual in that an entity outside of the central bank, namely the [[United States Department of the Treasury]], creates the [[currency]] used.<ref>{{cite web|title=Coins and Currency|url=http://www.treas.gov/topics/currency/|work=US Dept of Treasury website|date=August 24, 2011 |accessdate=August 29, 2011}}</ref>

According to the Board of Governors, the Federal Reserve is independent within government in that "its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government."{{Citation needed}}  Its authority is derived from statutes enacted by the [[U.S. Congress]] and the System is subject to congressional oversight. The members of the Board of Governors, including its chairman and vice-chairman, are chosen by the [[President of the United States|President]] and confirmed by the Senate. The government also exercises some control over the Federal Reserve by appointing and setting the salaries of the system's highest-level employees. Nationally chartered commercial banks are required to hold stock in the [[Federal Reserve Bank]] of their region; this entitles them to elect some of the members of the board of the regional Federal Reserve Bank. Thus the Federal Reserve system has both public and private aspects.<ref name="who_owns_faq">{{cite web|publisher=Federal Reserve website|url=http://www.federalreserve.gov/faqs/about_14986.htm|title=FAQ - Who owns the Federal Reserve?}}</ref><ref>{{cite web|title=Is the Fed Private or Public?|url=http://www.slate.com/id/2200411/|date=September 19, 2008|first=Juliet|last=Lapidos|publisher=Slate|accessdate=August 29, 2011}}</ref><ref>{{cite web|title=Federal Reserve System|url=http://eh.net/encyclopedia/article/toma.reserve|date=February 1, 2010|first=Mark|last=Toma|work=EH. Net Encyclopedia|publisher=Economic History Association|accessdate=February 27, 2011}}</ref><ref>{{cite web|title=Who owns the Federal Reserve Bank?|url=http://www.factcheck.org/askfactcheck/who_owns_the_federal_reserve_bank.html|date=March 31, 2008|work=FactCheck|accessdate=February 27, 2011}}</ref> The U.S. Government receives all of the system's annual profits, after a statutory [[dividend]] of 6% on member banks' capital investment is paid, and an account surplus is maintained. In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the [[U.S. Treasury]].<ref name="nyt transfer">{{cite news |url=http://www.nytimes.com/2011/03/23/business/economy/23fed.html?_r=1&ref=business |title=Fed Had Profit From Investments of $82 Billion Last Year |work=The New York Times|date=March 22, 2011 |accessdate=March 22, 2011 |first=Binyamin |last=Appelbaum}}</ref> This was followed at the end of 2011 with a transfer of $77 billion in profits to the U.S. Treasury Department.<ref>Fed Gives $77 Billion in Profits to Treasury Department Binyamin Appelbaum http://www.nytimes.com/2012/01/11/business/economy/fed-returns-77-billion-in-profits-to-treasury.html</ref>

==Purpose==
The primary motivation for creating the Federal Reserve System was to address [[bank run|banking panics]].<ref name="initial">{{harvnb|BoG|2006|pp=1}} "Just before the founding of the Federal Reserve, the nation was plagued with financial crises. At times, these crises led to 'panics,' in which people raced to their banks to withdraw their deposits. A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. Initially created to address these banking panics, the Federal Reserve is now charged with a number of broader responsibilities, including fostering a sound banking system and a healthy economy."</ref> Other purposes are stated in the [[Federal Reserve Act]], such as "to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes".<ref>{{cite web|url=http://www.federalreserve.gov/GeneralInfo/fract/|title=Federal Reserve Act|publisher=Board of Governors of the Federal Reserve System|date=May 14, 2003|archivedate=May 17, 2008|archiveurl=http://web.archive.org/web/20080517044141/http://www.federalreserve.gov/GeneralInfo/fract/}}</ref> Before the founding of the Federal Reserve, the United States underwent several financial crises. A particularly severe crisis in 1907 led Congress to enact the Federal Reserve Act in 1913. Today the Federal Reserve System has broader responsibilities than only ensuring the stability of the financial system.<ref name="BoG 2006 pp=1">{{harvnb|BoG|2006|pp=1}}</ref>

Current functions of the Federal Reserve System include:<ref name="mission"/><ref name="BoG 2006 pp=1"/>

*To address the problem of [[bank run|banking panics]]
*To serve as the [[central bank]] for the United States
*To strike a balance between private interests of banks and the centralized responsibility of government
**To supervise and regulate banking institutions
**To protect the credit rights of consumers
*To manage the nation's [[money supply]] through [[monetary policy]] to achieve the sometimes-conflicting goals of
**maximum employment
**stable prices, including prevention of either [[inflation]] or [[deflation]]<ref>{{cite web|url=http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm |title=Deflation: Making Sure "It" Doesn't Happen Here |author=Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. |publisher=Board of Governors of the Federal Reserve System |date=November 21, 2002 |accessdate=October 29, 2011}}</ref>
**moderate long-term interest rates
*To maintain the stability of the financial system and contain [[systemic risk]] in financial markets
*To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system
**To facilitate the exchange of payments among regions
**To respond to local liquidity needs
*To strengthen U.S. standing in the world economy

===Addressing the problem of bank panics===
{{Further|bank run|fractional-reserve banking}}
Banking institutions in the United States are required to hold reserves --- amounts of currency and deposits in other banks -- equal to only a fraction of the amount of the banks' deposit liabilities owed to customers. This practice is called [[fractional-reserve banking]]. As a result, banks usually invest the majority of the funds received from depositors. On rare occasion, too many of the bank's customers will withdraw their savings and the bank will need help from another institution to continue operating; this is called a bank run. Bank runs can lead to a multitude of social and economic problems. The Federal Reserve System was designed as an attempt to prevent or minimize the occurrence of bank runs, and possibly act as a lender of last resort when a bank run does occur. Many economists, following [[Milton Friedman]], believe that the Federal Reserve inappropriately refused to lend money to small banks during the bank runs of 1929.<ref name="Federal Reserve Board">{{cite web |url=http://www.federalreserve.gov/boardDocs/Speeches/2003/20031024/default.htm|format=text|title=Remarks by Governor Ben S. Bernanke: At the Federal Reserve Bank of Dallas Conference on the Legacy of Milton and Rose Friedman's Free to Choose, Dallas, Texas|author=Bernanke, Ben|date=October 24, 2003}}</ref>

====Elastic currency====
[[File:Monthly Changes in Currency Component of United States Money Supply.gif|thumb|360px|The monthly changes in the currency component of the U.S. money supply show currency being added into (% change greater than zero) and removed from circulation (% change less than zero). The most noticeable changes occur around the [[Christmas]] holiday shopping season as new currency is created so people can make withdrawals at banks, and then removed from circulation afterwards, when less cash is demanded.]]
One way to lessen the likelihood and the effect of bank runs is to have a money supply that can expand when money is needed. The use of the term "elastic currency" in the Federal Reserve Act does not imply only the ability to expand the money supply, but also the ability to contract the money supply. Some economic theories have been developed that support the idea of expanding or shrinking a money supply as economic conditions warrant. Elastic currency is defined by the Federal Reserve as:<ref>{{harvnb|BoG|2005|pp=113}}</ref>

{{quote|Currency that can, by the actions of the central monetary authority, expand or contract in amount warranted by economic conditions.}}

Monetary policy of the Federal Reserve System is based partially on the theory that it is best overall to expand or contract the money supply as economic conditions change.

====Check clearing system====
Because some banks refused to clear checks from certain others during times of economic uncertainty, a check-clearing system was created in the Federal Reserve system.  It is briefly described in ''The Federal Reserve System—Purposes and Functions'' as follows:<ref>{{harvnb|BoG|2005|pp=83}}</ref>

{{quote|By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1907. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system. The System, then, was to provide not only an elastic currency—that is, a currency that would expand or shrink in amount as economic conditions warranted—but also an efficient and equitable check-collection system.}}

====Lender of last resort====
In the United States, the Federal Reserve serves as the [[lender of last resort]] to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy. It took over this role from the private sector "clearing houses" which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs.

=====Emergencies=====
According to the [[Federal Reserve Bank of Minneapolis]], "the Federal Reserve has the authority and financial resources to act as 'lender of last resort' by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy."<ref>[http://www.minneapolisfed.org/glossary.cfm?js=0#l lender of last resort], [[Federal Reserve Bank of Minneapolis]], Retrieved May 21, 2010</ref>  The Federal Reserve System's role as lender of last resort has been criticized because it shifts the risk and responsibility away from lenders and borrowers and places it on others in the form of inflation.<ref>{{cite book|title=The Creature from Jekyll Island: A Second Look at the Federal Reserve |first=G. Edward |last=Griffin |year=2002 |publisher=American Media |isbn=978-0-912986-39-5}}</ref>

=====Fluctuations=====
Through its discount and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. Longer term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is the [[discount rate]] (officially the primary credit rate).

By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates.<ref name="dfeverydayecon"/>  For example, on September 16, 2008, the Federal Reserve Board authorized an $85 billion loan to stave off the bankruptcy of international insurance giant [[American International Group]] (AIG).<ref name = 'Federal Reserve-AIG Press Release-2008-09-16'>{{cite web|url= http://www.federalreserve.gov/newsevents/press/other/20080916a.htm |title=Press Release: Federal Reserve Board, with full support of the Treasury Department, authorizes the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) |date=September 16, 2008 |publisher=Board of Governors of the Federal Reserve |accessdate=August 29, 2011}}</ref><ref name= 'NYT-Andrews-2008-09-16'>
{{cite news |first=Edmund  L. |last= Andrews |first2= Michael J. |last2=de la Merced |first3=Mary Williams |last3=Walsh |title= Fed's $85 Billion Loan Rescues Insurer |date=September 16, 2008|url= http://www.nytimes.com/2008/09/17/business/17insure.html?hp |newspaper=The New York Times |accessdate =September 17, 2008}}</ref>

===Central bank===
{{Further|Central bank}}
In its role as the [[central bank]] of the United States, the Fed serves as a banker's bank and as the government's bank.  As the banker's bank, it helps to assure the safety and efficiency of the payments system.  As the government's bank, or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars.  Just as an individual might keep an account at a bank, the [[United States Department of the Treasury|U.S. Treasury]] keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled. As part of this service relationship, the Fed sells and redeems [[Treasury security|U.S. government securities]] such as savings bonds and Treasury bills, notes and bonds.  It also issues the nation's [[coin]] and [[paper currency]]. The U.S. Treasury, through its [[United States Mint|Bureau of the Mint]] and [[Bureau of Engraving and Printing]], actually produces the nation's cash supply and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways.<ref name="Fed_currency">{{cite web|publisher=Federal Reserve Bank of New York |url= http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html |title=How Currency Gets into Circulation |month=June |year=2008 |accessdate=August 29, 2011}}</ref> During the [[Fiscal Year]] 2008, the Bureau of Engraving and Printing delivered 7.7 billion notes at an average cost of 6.4 cents per note.<ref name="Bureau_cost">{{cite web|publisher=Bureau of Engraving and Printing |url= http://www.bep.treas.gov/uscurrency/annualproductionfigures.html |title=Annual Production Figures |accessdate=August 29, 2011 }}</ref>

====Federal funds====
{{Main|Federal funds}}
Federal funds are the reserve balances (also called federal reserve accounts) that private banks keep at their local Federal Reserve Bank.<ref name="fedfunds">{{cite web|url=http://www.newyorkfed.org/aboutthefed/fedpoint/fed15.html|title=Federal Funds |publisher=Federal Reserve Bank of New York|month=August|year=2007|accessdate=August 29, 2011}}</ref><ref>{{cite web|url=http://www.richmondfed.org/publications/research/special_reports/instruments_of_the_money_market/pdf/full_publication.pdf |editor-first=Timothy Q. |editor-last=Cook|editor2-first=Robert K.|editor2-last=Laroche|publisher=Federal Reserve Bank of Richmond |title=Instruments of the Money Market|year=1993|accessdate=August 29, 2011}}</ref> These balances are the namesake reserves of the Federal Reserve System. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism for private banks to lend funds to one another. This market for funds plays an important role in the Federal Reserve System as it is what inspired the name of the system and it is what is used as the basis for monetary policy. Monetary policy works partly by influencing how much interest the private banks charge each other for the lending of these funds.

Federal reserve accounts contain federal reserve credit, which can be converted into [[federal reserve note]]s. Private banks maintain their [[bank reserves]] in federal reserve accounts.

===Balance between private banks and responsibility of governments===
The system was designed out of a compromise between the competing philosophies of privatization and government regulation. In 2006 [[Donald L. Kohn]], vice chairman of the Board of Governors, summarized the history of this compromise:<ref>{{cite web|url=http://www.federalreserve.gov/newsevents/speech/kohn20061103a.htm |title=FRB: Speech-Kohn, The Evolving Role of the Federal Reserve Banks |publisher=Federalreserve.gov |date=November 3, 2006 |accessdate=August 29, 2011}}</ref>

{{quote|Agrarian and progressive interests, led by [[William Jennings Bryan]], favored a central bank under public, rather than banker, control. But the vast majority of the nation's bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees.

The legislation that Congress ultimately adopted in 1913 reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today.}}

In the current system, private banks are for-profit businesses but government regulation places restrictions on what they can do. The Federal Reserve System is a part of government that regulates the private banks.  The balance between privatization and government involvement is also seen in the structure of the system.  Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the Board of Governors are selected by the [[President of the United States]] and confirmed by the [[United States Senate|Senate]].  The private banks give input to the government officials about their economic situation and these government officials use this input in Federal Reserve policy decisions.  In the end, private banking businesses are able to run a profitable business while the U.S. government, through the Federal Reserve System, oversees and regulates the activities of the private banks.

====Government regulation and supervision====
[[File:House Financial Services Committee hearing with Ben Bernanke.jpg|thumb|right|Ben Bernanke (lower-right), Chairman of the Federal Reserve Board of Governors, at a [[House Financial Services Committee]] hearing on February 10, 2009.  Members of the Board frequently testify before congressional committees such as this one.  The Senate equivalent of the House Financial Services Committee is the [[Senate Committee on Banking, Housing, and Urban Affairs]].]]

The Federal Banking Agency Audit Act, enacted in 1978 as Public Law 95-320 and 31 U.S.C. section 714 establish that the Board of Governors of the Federal Reserve System and the Federal Reserve banks may be audited by the [[Government Accountability Office]] (GAO).<ref>{{cite web |url=http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm|title=Frequently Asked Questions Federal Reserve System  |accessdate=February 19, 2010 |quote=The Board of Governors, the Federal Reserve Banks, and the Federal  Reserve System as a whole are all subject to several levels of audit and  review. Under the Federal Banking Agency Audit Act, the Government  Accountability Office (GAO) has conducted numerous reviews of Federal Reserve activities}}{{dead link|date=August 2011}}</ref>
The GAO has authority to audit check-processing, currency storage and shipments, and some regulatory and bank examination  functions, however there are restrictions to what the GAO may audit. Audits of the Reserve Board and Federal Reserve banks may not include:
#transactions for or with a foreign central bank or government, or nonprivate international financing organization;
#deliberations, decisions, or actions on monetary policy matters;
#transactions made under the direction of the Federal Open Market Committee; or
#a part  of a discussion or communication among or between members of the Board of  Governors and officers and employees of the Federal Reserve System  related to items (1), (2), or (3).<ref>{{cite web |url=http://www.gao.gov/archive/1996/gg96159t.pdf| title=Federal Reserve System Current and Future Challenges Require System wide Attention: Statement of Charles A. Bowsher|publisher=United States General Accounting Office |date=July 26, 1996 |accessdate=August 29, 2011}}

Under the Federal Banking  Agency Audit Act, 31 U.S.C. section 714(b), our audits of the Federal Reserve Board and Federal Reserve banks may not include (1) transactions  for or with a foreign central bank or government, or nonprivate international financing  organization; (2) deliberations, decisions, or actions on monetary policy matters; (3) transactions made  under the direction of the Federal Open Market Committee; or (4) a part of a discussion or  communication among or between members of the Board of Governors and officers and employees of the  Federal Reserve System related to items (1), (2), or (3). See Federal Reserve System Audits:  Restrictions on GAO's Access (GAO/T-GGD-94-44), statement of Charles A. Bowsher.

The real purpose of this historic "duck hunt" was to formulate a plan for U.S. banking and currency reform that Aldrich could present to Congress.

</ref><ref>{{cite web |url=http://www.auditthefed.com/about-the-audit/|title=About The Audit |publisher=Audit the Fed Coalition |year=2009 |accessdate=August 29, 2011}}
The Audit the Fed Coalition asserts that although the Fed is currently audited by outside agencies, these audits are not thorough and do not include monetary policy decisions or agreements with foreign central banks and governments. According to the Coaliition, the crucial issue of Federal Reserve transparency requires an analysis of 31 USC 714, the section of U.S. Code which establishes that the Federal Reserve may be audited by the Government Accountability Office (GAO), but which simultaneously severely restricts what the GAO  may in fact audit. The coalition argues that the GAO is allowed to audit only check-processing, currency storage and shipments, and some regulatory and bank examination functions, etc. The Coalition contends that the most important matters, which directly affect the strength of the dollar and the health of the financial system, are immune from oversight.</ref>

The [[Financial crisis of 2007-2010|financial crisis which began in 2007]], corporate [[bailouts]], and concerns over the Fed's secrecy have brought renewed concern regarding ability of the Fed to effectively manage the national monetary system.<ref>{{cite web |url=http://www.auditthefed.com/|title=  An Open Letter to the U.S. House of Representatives|publisher=Audit the Fed Coalition |year=2009 |accessdate=August 29, 2011}}</ref>  A July 2009 Gallup Poll found only 30% Americans thought the Fed was doing a good or excellent job, a rating even lower than that for the Internal Revenue Service, which drew praise from 40%.<ref>{{cite news |url=http://online.wsj.com/article/SB125876136781358287.html| title=Congress Grows Fed Up Despite Central Bank's Push |accessdate=February 19, 2010 | work=The Wall Street Journal | first=Sudeep | last=Reddy | date=November 23, 2009|accessdate=August 29, 2011}}The Fed's ability to influence Congress is diluted by public anger. A  July 2009 Gallup Poll found only 30% Americans thought the Fed was doing a good or excellent job, a rating even lower than that for the Internal  Revenue Service, which drew praise from 40%.</ref>  The [[Federal Reserve Transparency Act]] was introduced by [[congressman]] [[Ron Paul]] in order to obtain a more detailed audit of the Fed.  The Fed has since hired Linda Robertson who headed the Washington [[lobbying]] office of [[Enron]] Corp. and was adviser to all three of the [[Clinton administration]]'s Treasury secretaries.<ref>{{cite news |url=http://www.bloomberg.com/apps/news?pid=20601087&sid=aZjQKyLci1AM|title=Fed Intends to  Hire Lobbyist in Campaign to Buttress Its Image|first=Robert |last=Schmidt |date=June 5, 2009 |accessdate=August 29, 2011 |work=Bloomberg}}</ref><ref>{{cite web |url=http://www.federalreserve.gov/releases/h2/20090725/default.htm| title= Board Actions taken during the week ending July 25, 2009|accessdate=August 29, 2011}}</ref><ref>{{cite web |url=http://gazette.jhu.edu/2009/06/08/vp-linda-robertson-to-join-federal-reserve-system/|title=VP Linda Robertson to join Federal Reserve System|accessdate=August 29, 2011|publisher=The Johns Hopkins University}}</ref><ref>{{cite video |people= Mark Calabria, Bert  Ely, Congressman Ron Paul, Gilbert Schwartz|date=June 24, 2009|title = Ron Paul: Bringing Transparency to the Federal Reserve|url=http://fora.tv/2009/06/24/Ron_Paul_Bringing_Transparency_to_the_Federal_Reserve|publisher=FORA.tv. |location=Cato Institute|accessdate=August 29, 2011|time=00:11:04}}</ref>

The Board of Governors in the Federal Reserve System has a number of supervisory and regulatory responsibilities in the U.S. banking system, but not complete responsibility.  A general description of the types of regulation and supervision involved in the U.S. banking system is given by the Federal Reserve:<ref>{{harvnb|BoG|2005|pp=4–5}}</ref>

{{quote|The Board also plays a major role in the supervision and regulation of the U.S. banking system. It has supervisory responsibilities for state-chartered banks<ref>See example: {{cite web|url=http://www.state.ar.us/bank/benefits_advantages.html |publisher=Arkansas State Bank Department |title=Advantages of Being/Becoming a State Chartered Bank| date=March 31, 2009|accessdate=August 29, 2011}}</ref> that are members of the Federal Reserve System, [[Bank holding company|bank holding companies]] (companies that control banks), the foreign activities of member banks, the U.S. activities of foreign banks, and [[Edge Act]] and "agreement corporations" (limited-purpose institutions that engage in a foreign banking business). The Board and, under delegated authority, the Federal Reserve Banks, supervise approximately 900 state member banks and 5,000 bank holding companies. Other federal agencies also serve as the primary federal supervisors of commercial banks; the [[Office of the Comptroller of the Currency]] supervises national banks, and the [[Federal Deposit Insurance Corporation]] supervises [[state bank]]s that are not members of the Federal Reserve System.

Some regulations issued by the Board apply to the entire banking industry, whereas others apply only to member banks, that is, [[state bank]]s that have chosen to join the Federal Reserve System and national banks, which by law must be members of the System. The Board also issues regulations to carry out major federal laws governing [[Consumer protection|consumer credit protection]], such as the [[Truth in Lending Act|Truth in Lending]], [[Equal Credit Opportunity Act|Equal Credit Opportunity]], and [[Home Mortgage Disclosure Act]]s. Many of these consumer protection regulations apply to various lenders outside the banking industry as well as to banks.

Members of the Board of Governors are in continual contact with other policy makers in government. They frequently testify before [[congressional committee]]s on the economy, [[monetary policy]], [[Bank regulation|banking supervision and regulation]], [[Consumer protection|consumer credit protection]], [[financial market]]s, and other matters.

The Board has regular contact with members of the President's [[Council of Economic Advisers]] and other key economic officials. The Chairman also meets from time to time with the [[President of the United States]] and has regular meetings with the [[Secretary of the Treasury]]. The Chairman has formal responsibilities in the international arena as well.}}

=====Preventing asset bubbles=====
The board of directors of each Federal Reserve Bank District also has regulatory and supervisory responsibilities.  For example, a member bank (private bank) is not permitted to give out too many loans to people who cannot pay them back. This is because too many defaults on loans will lead to a bank run.  If the board of directors has judged that a member bank is performing or behaving poorly, it will report this to the Board of Governors.  This policy is described in United States Code:<ref>{{cite web|url=http://www.law.cornell.edu/uscode/html/uscode12/usc_sec_12_00000301----000-.html |title=U.S. Code Title 12, Chapter 3, Subchapter 7, Section 301. Powers and duties of board of directors; suspension of member bank for undue use of bank credit |publisher=Law.cornell.edu |date=June 22, 2010 |accessdate=August 29, 2011}}</ref>

{{quote|Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.}}

The punishment for [[making false statements]] or reports that overvalue an asset is also stated in the U.S. Code:<ref>{{cite web|url=http://www.law.cornell.edu/uscode/18/1014.html |title=U.S. Code: Title 18, Part 1, Chapter 47, section 1014. Loan and credit applications generally; renewals and discounts; crop insurance |publisher=Law.cornell.edu |date=June 28, 2010 |accessdate=August 29, 2011}}</ref>

{{quote|Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way...shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.}}

These aspects of the Federal Reserve System are the parts intended to prevent or minimize speculative asset bubbles, which ultimately lead to severe market corrections. The recent bubbles and corrections in energies, grains, equity and debt products and real estate cast doubt on the efficacy of these controls.

===National payments system===
The Federal Reserve plays an important role in the U.S. payments system. The twelve Federal Reserve Banks provide banking services to depository institutions and to the federal government.  For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin.  For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming U.S. government securities.<ref>{{harvnb|BoG|2005|pp=83–85}}</ref>

In passing the [[Depository Institutions Deregulation and Monetary Control Act]] of 1980, Congress reaffirmed its intention that the Federal Reserve should promote an efficient nationwide payments system. The act subjects all depository institutions, not just member commercial banks, to reserve requirements and grants them equal access to Reserve Bank payment services. It also encourages competition between the Reserve Banks and private-sector providers of payment services by requiring the Reserve Banks to charge fees for certain payments services listed in the act and to recover the costs of providing these services over the long run.

The Federal Reserve plays a vital role in both the nation's retail and wholesale payments systems, providing a variety of financial services to depository institutions. Retail payments are generally for relatively small-dollar amounts and often involve a depository institution's retail clients—individuals and smaller businesses. The Reserve Banks' retail services include distributing currency and coin, collecting checks, and electronically transferring funds through the automated clearinghouse system. By contrast, wholesale payments are generally for large-dollar amounts and often involve a depository institution's large corporate customers or counterparties, including other financial institutions. The Reserve Banks' wholesale services include electronically transferring funds through the [[Fedwire|Fedwire Funds Service]] and transferring securities issued by the U.S. government, its agencies, and certain other entities through the Fedwire Securities Service. Because of the large amounts of funds that move through the Reserve Banks every day, the System has policies and procedures to limit the risk to the Reserve Banks from a depository institution's failure to make or settle its payments.

The Federal Reserve Banks began a multi-year restructuring of their check operations in 2003 as part of a long-term strategy to respond to the declining use of checks by consumers and businesses and the greater use of electronics in check processing.  The Reserve Banks will have reduced the number of full-service check processing locations from 45 in 2003 to 4 by early 2011.<ref>{{cite web|url=http://www.federalreserve.gov/paymentsystems/default.htm |title=Federal Reserve Board: Payments Systems |publisher=Federalreserve.gov |date=July 21, 2011 |accessdate=August 29, 2011}}</ref>

==Structure==
{{Main|Structure of the Federal Reserve System}}
[[File:Organiztion of the Federal Reserve System.jpg|thumb|right|309px|Organization of the Federal Reserve System]]

The Federal Reserve System has a "unique structure that is both public
and private", and is described as operating "independently within the government, but
independent of it".<ref name=FRBPhilPubPriv>[http://www.philadelphiafed.org/education/teachers/resources/fed-today/fed-today_lesson-3.pdf "Is The Fed Public Or Private?"] [[Federal Reserve Bank of Philadelphia]]. Retrieved June 29, 2012.</ref> The System does not require public funding, and derives its authority and purpose from the [[Federal Reserve Act]], which was passed by Congress in 1913 and is subject to Congressional modification or repeal.<ref name=FRBPhilPubPriv /> The four main components of the Federal Reserve System are (1) the Board of Governors, (2) the Federal Open Market Committee, (3) the twelve regional Federal Reserve Banks, and (4) the member banks throughout the country.

===Board of Governors===
{{Main|Federal Reserve Board of Governors}}
The seven-member Board of Governors is a federal agency. It is charged with the overseeing of the 12 District Reserve Banks and setting national monetary policy. It also supervises and regulates the U.S. banking system in general.<ref>{{usc|12|247}}.</ref>
Governors are appointed by the [[President of the United States]] and confirmed by the [[United States Senate|Senate]] for staggered 14-year terms.<ref name="dfeverydayecon">{{cite web|url=http://www.dallasfed.org/educate/everyday/ev4.html |title=The Federal Reserve, Monetary Policy and the Economy—Everyday Economics—FRB Dallas |publisher=Dallasfed.org |date= |accessdate=August 29, 2011}}</ref> One term begins every two years, on February 1 of even-numbered years, and members serving a full term cannot be renominated for a second term.<ref name=FRB01/> "[U]pon the expiration of their terms of office, members of the Board shall continue to serve until their successors are appointed and have qualified." The law provides for the removal of a member of the Board by the President "for cause".<ref name=usc12-242>See {{usc|12|242}}.</ref> The Board is required to make an annual report of operations to the Speaker of the U.S. House of Representatives.

The Chairman and Vice Chairman of the Board of Governors are appointed by the [[President of the United States|President]] from among the sitting Governors. They both serve a four year term and they can be renominated as many times as the President chooses, until their terms on the Board of Governors expire.<ref name=usc12-241>See {{usc|12|241}}</ref>

====List of members of the Board of Governors====
The current members of the Board of Governors are as follows:<ref name=FRB01>{{cite web|url=http://www.federalreserve.gov/aboutthefed/bios/board/default.htm |title=FRB: Board Members |publisher=Federalreserve.gov |date=July 20, 2011 |accessdate=August 29, 2011}}</ref>

{| class="wikitable"
|-
! Commissioner
! Entered office<ref>{{cite web|url=http://www.federalreserve.gov/bios/boardmembership.htm |title=Membership of the Board of Governors of the Federal Reserve System, 1914–Present |publisher=Federalreserve.gov |date=August 12, 2011 |accessdate=August 29, 2011}}</ref>
! Term expires
|-
| [[Ben Bernanke]]<br />(Chairman)
| February 1, 2006
| January 31, 2020<br />January 31, 2014  (as Chairman)
|-
| [[Janet Yellen]]<br />(Vice Chairman)
| October 4, 2010
| January 31, 2024<br />October 4, 2014  (as Vice Chairman)
|-
| [[Elizabeth A. Duke]]
| August 5, 2008
| ''January 31, 2012''
|-
| [[Daniel Tarullo]]
| January 28, 2009
| January 31, 2022
|-
| [[Sarah Bloom Raskin]]
| October 4, 2010
| January 31, 2016
|-
| [[Jerome H. Powell]]
| May 25, 2012
| January 31, 2014
|-
| [[Jeremy C. Stein]]
| May 30, 2012
| January 31, 2018
|}

====Nominations and confirmations====
In late December 2011, President [[Barack Obama]] nominated Stein, a [[Harvard University]] finance professor and [[Democratic Party of the United States|Democrat]], and Powell, formerly of [[Dillon Read]], [[Bankers Trust]]<ref name=MW01/> and [[The Carlyle Group]]<ref>[http://www.bipartisanpolicy.org/about/economic-policy-project/jerome-powell "Jerome Powell: Visiting Scholar"]. [[Bipartisan Policy Center]]. Retrieved December 27, 2011.</ref> and a [[Republican Party of the United States|Republican]]. Both candidates also have [[United States Treasury|Treasury Department]] experience in the Obama and [[George H.W. Bush]] administrations respectively.<ref name=MW01>Goldstein, Steve (December 27, 2011). [http://www.marketwatch.com/story/obama-to-nominate-stein-powell-to-fed-board-2011-12-27?link=MW_home_latest_news "Obama to nominate Stein, Powell to Fed board"]. ''MarketWatch''. Retrieved December 27, 2011.</ref>

"Obama administration officials [had] regrouped to identify Fed candidates after [[Peter Diamond]], a Nobel Prize-winning economist, withdrew his nomination to the board in June [2011] in the face of Republican opposition. [[Richard Clarida]], a potential nominee who was a Treasury official under [[George W. Bush]], pulled out of consideration in August [2011]", one account of the December nominations noted.<ref>Lanman, Scott; Runningen, Roger (December 27, 2011). [http://www.bloomberg.com/news/2011-12-27/obama-to-nominate-jerome-powell-jeremy-stein-to-fed-s-board-of-governors.html "Obama to Choose Powell, Stein for Fed Board"]. Bloomberg LP. Retrieved December 27, 2011.</ref> The two other Obama nominees in 2011, Yellen and Raskin,<ref>Robb, Greg (April 29, 2010). [http://www.marketwatch.com/story/obama-nominates-3-to-federal-reserve-board-2010-04-29 "Obama nominates 3 to Federal Reserve board"]. ''[[MarketWatch]]''. Retrieved April 29, 2010.</ref> were confirmed in September.<ref>Lanman, Scott (September 30, 2010). [http://www.bloomberg.com/news/2010-09-30/yellen-raskin-win-fed-board-confirmation-as-vote-on-monetary-easing-nears.html "Yellen, Raskin Win Senate Approval for Fed Board of Governors"]. Bloomberg LP. Retrieved December 27, 2011.</ref> One of the vacancies was created in 2011 with the resignation of [[Kevin Warsh]], who took office in 2006 to fill the unexpired term ending January 31, 2018, and resigned his position effective March 31, 2011.<ref>Censky, Annalyn (February 10, 2011). [http://money.cnn.com/2011/02/10/news/economy/fed_official_warsh_resigns/index.htm "Fed inflation hawk Warsh resigns"]. ''[[CNNMoney]]''. Retrieved December 27, 2011.</ref><ref>Chan, Sewell (February 10, 2011). [http://www.nytimes.com/2011/02/11/business/economy/11fed.html "Sole Fed Governor With Close Ties to Conservatives Resigns"]. ''The New York Times''. Retrieved December 27, 2011.</ref> In March 2012, U.S. Senator [[David Vitter]] ([[Republican Party of the United States|R]], [[Louisiana|LA]]) said he would oppose Obama's Stein and Powell nominations, dampening near-term hopes for approval.<ref>Robb, Greg (March 28, 2012). [http://www.marketwatch.com/story/senator-to-block-quick-vote-on-fed-picks-report-2012-03-28?link=MW_latest_news "Senator to block quick vote on Fed picks: report"]. ''MarketWatch''. Retrieved March 28, 2012.</ref>  However Senate leaders reached a deal, paving the way for affirmative votes on the two nominees in May 2012 and bringing the board to full strength for the first time since 2006<ref>Robb, Greg, [http://www.marketwatch.com/story/stein-sworn-in-as-fed-governor-2012-05-30 "Stein sworn in as Fed governor"], ''MarketWatch'', May 30, 2012. Retrieved May 30, 2012.</ref> with Duke's service after term end.

===Federal Open Market Committee===
{{Main|Federal Open Market Committee}}
The Federal Open Market Committee (FOMC) consists of 12 members, seven from the Board of Governors and 5 of the regional Federal Reserve Bank presidents. The FOMC oversees [[open market operations]], the principal tool of national monetary policy. These operations affect the amount of Federal Reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions. The FOMC also directs operations undertaken by the Federal Reserve in foreign exchange markets. The president of the Federal Reserve Bank of New York is a permanent member of the FOMC, while the rest of the bank presidents rotate at two- and three-year intervals.  All Regional Reserve Bank presidents contribute to the committee's assessment of the economy and of policy options, but only the five presidents who are then members of the FOMC vote on policy decisions. The FOMC determines its own internal organization and, by tradition, elects the Chairman of the Board of Governors as its chairman and the president of the Federal Reserve Bank of New York as its vice chairman.  It is informal policy within the FOMC for the Board of Governors and the New York Federal Reserve Bank president to vote with the Chairman of the FOMC; anyone who is not an expert on monetary policy traditionally votes with the chairman as well; and in any vote no more than two FOMC members can dissent.<ref name="Laws of the Fed">{{cite web|title=Laws of the Fed|url=http://blogs.ft.com/money-supply/2010/07/07/laws-of-the-fed/|accessdate=July, 14 2010}}{{dead link|date=August 2011}}</ref> Formal meetings typically are held eight times each year in Washington, D.C. Nonvoting Reserve Bank presidents also participate in Committee deliberations and discussion. The FOMC generally meets eight times a year in telephone consultations and other meetings are held when needed.<ref>{{harvnb|BoG|2005|pp=11–12}}</ref>

===Federal Advisory Council===
{{Main|Federal Advisory Council}}

===Federal Reserve Banks===
{{Main|Federal Reserve Bank}}
[[File:Federal Reserve Districts Map.svg|400px|right|Federal Reserve Districts|thumb]]
There are 12 Federal Reserve Banks located in [[Federal Reserve Bank of Boston|Boston]], [[Federal Reserve Bank of New York|New York]], [[Federal Reserve Bank of Philadelphia|Philadelphia]], [[Federal Reserve Bank of Cleveland|Cleveland]], [[Federal Reserve Bank of Richmond|Richmond]], [[Federal Reserve Bank of Atlanta|Atlanta]], [[Federal Reserve Bank of Chicago|Chicago]], [[Federal Reserve Bank of St Louis|St Louis]], [[Federal Reserve Bank of Minneapolis|Minneapolis]], [[Federal Reserve Bank of Kansas City|Kansas City]], [[Federal Reserve Bank of Dallas|Dallas]], and [[Federal Reserve Bank of San Francisco|San Francisco]]. Each reserve Bank is responsible for member banks located in its district. The size of each district was set based upon the population distribution of the United States when the Federal Reserve Act was passed. Each regional Bank has a president, who is the chief executive officer of their Bank. Each regional Reserve Bank's president is nominated by their Bank's board of directors, but the nomination is contingent upon approval by the Board of Governors. Presidents serve five year terms and may be reappointed.<ref name="FRB_pres">{{cite web|url=http://www.federalreserve.gov/aboutthefed/bios/banks/default.htm |title=FRB: Federal Reserve Bank Presidents |publisher=Federalreserve.gov |date=July 20, 2011 |accessdate=August 29, 2011}}</ref>

Each regional Bank's board consists of nine members. Members are broken down into three classes: A, B, and C. There are three board members in each class. Class A members are chosen by the regional Bank's shareholders, and are intended to represent member banks' interests. Member banks are divided into three categories large, medium, and small. Each category elects one of the three class A board members. Class B board members are also nominated by the region's member banks, but class B board members are supposed to represent the interests of the public. Lastly, class C board members are nominated by the Board of Governors, and are also intended to represent the interests of the public.<ref>{{cite web|url=http://www.law.cornell.edu/uscode/html/uscode12/usc_sup_01_12_10_3_20_VII.html |title=US CODE: Title 12, Subchapter VII—Directors of Federal Reserve Banks; Reserve Agents and Assistants |publisher=Law.cornell.edu |date=June 22, 2010 |accessdate=August 29, 2011}}</ref>

A member bank is a private institution and owns stock in its regional Federal Reserve Bank. All nationally chartered banks hold stock in one of the Federal Reserve Banks. State chartered banks may choose to be members (and hold stock in their regional Federal Reserve bank), upon meeting certain standards. About 38% of U.S. banks are members of their regional Federal Reserve Bank.<ref name="Factcheck">{{cite web|title=Who owns the Federal Reserve Bank?|url=http://www.factcheck.org/askfactcheck/who_owns_the_federal_reserve_bank.html|accessdate=October, 16 2010}}</ref> The amount of stock a member bank must own is equal to 3% of its combined capital and surplus.<ref>{{cite book|title=Federal Reserve Act|url=http://www.federalreserve.gov/aboutthefed/fract.htm|date=December 14, 2010|publisher=Board of Governors of the Federal Reserve System|chapter=Section 2.3 Subscription to Stock by National Banks|chapterurl=http://www.federalreserve.gov/aboutthefed/section2.htm|accessdate=February 6, 2011|ref=harv}}</ref><ref>{{cite book|title=Federal Reserve Act|url=http://www.federalreserve.gov/aboutthefed/fract.htm|date=December 14, 2010|publisher=Board of Governors of the Federal Reserve System|chapter=Section 5.1 Amount of Shares; Increase and Decrease of Capital; Surrender and Cancellation of Stock|chapterurl=http://www.federalreserve.gov/aboutthefed/section5.htm|accessdate=February 6, 2011|ref=harv}}</ref> However, holding stock in a Federal Reserve bank is not like owning stock in a publicly traded company. These stocks cannot be sold or traded, and member banks do not control the Federal Reserve Bank as a result of owning this stock. The charter and organization of each Federal Reserve Bank is established by law and cannot be altered by the member banks.  Member banks, do however, elect six of the nine members of the Federal Reserve Banks' boards of directors.<ref name="dfeverydayecon"/><ref name='R000107'>{{cite journal|title= Money and the Federal Reserve System: Myth and Reality – CRS Report for Congress, No. 96-672 E|journal=Congressional Research Service Library of Congress |date=July 31, 1996|first=G. Thomas |last=Woodward|url=http://home.hiwaay.net/~becraft/FRS-myth.htm|accessdate=November 23, 2008|ref= harv }}</ref> From the profits of the Regional Bank of which it is a member, a  member bank receives a dividend equal to 6% of their purchased stock.<ref name="who_owns_faq" /> The remainder of the regional Federal Reserve Banks' profits is given over to the [[United States Treasury Department]]. In 2009, the Federal Reserve Banks distributed $1.4 billion in dividends to member banks and returned $47 billion to the U.S. Treasury.<ref>{{cite web|url=http://www.federalreserve.gov/boarddocs/rptcongress/annual09/sec6/c3.htm |title=The Federal Reserve Board 2009 Annual Report – Federal Reserve Banks Combined Financial Statements |publisher=Federalreserve.gov |date=July 22, 2011 |accessdate=August 29, 2011}}</ref>

====Legal status of regional Federal Reserve Banks====
The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally-created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.<ref name="Scott 8th Cir. 2005">[http://www.ca8.uscourts.gov/opndir/05/04/042357P.pdf Kennedy C. Scott v. Federal Reserve Bank of Kansas City, et al.], [http://bulk.resource.org/courts.gov/c/F3/406/406.F3d.532.04-2357.html 406 F.3d 532] (8th Cir. 2005).</ref> In ''Lewis v. United States'',<ref name=Lewis-vs-U.S.>[http://bulk.resource.org/courts.gov/c/F2/680/680.F2d.1239.80-5905.html 680 F.2d 1239] (9th Cir. 1982).</ref> the [[United States Court of Appeals for the Ninth Circuit]] stated that: "The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the [[Federal Tort Claims Act]]], but are independent, privately owned and locally controlled corporations." The opinion went on to say, however, that: "The Reserve Banks have properly been held to be federal instrumentalities for some purposes." Another relevant decision is ''Scott v. Federal Reserve Bank of Kansas City'',<ref name="Scott 8th Cir. 2005"/> in which the distinction is made between Federal Reserve Banks, which are federally-created instrumentalities, and the Board of Governors, which is a federal agency.

Regarding the structural relationship between the twelve Federal Reserve banks and the various commercial (member) banks, political science professor Michael D. Reagan has written that:<ref>Michael D. Reagan, "The Political Structure of the Federal Reserve System," ''American Political Science Review'', Vol. 55 (March 1961), pp. 64-76, as reprinted in ''Money and Banking: Theory, Analysis, and Policy'', p. 153, ed. by S. Mittra (Random House, New York 1970).</ref>
{{quote|... the "ownership" of the Reserve Banks by the commercial banks is symbolic; they do not exercise the proprietary control associated with the concept of ownership nor share, beyond the statutory dividend, in Reserve Bank "profits." ... Bank ownership and election at the base are therefore devoid of substantive significance, despite the superficial appearance of private bank control that the formal arrangement creates.}}

===Member banks===

According to the web site for the Federal Reserve Bank of Richmond, "[m]ore than one-third of U.S. commercial banks are members of the Federal Reserve System. National banks must be members; state chartered banks may join by meeting certain requirements."<ref>{{cite web|url=http://www.richmondfed.org/banking/federal_reserve_membership/ |title=Federal Reserve Membership|publisher=Federal Reserve Bank of Richmond|date= |accessdate=April 30, 2012}}</ref>

===Accountability===
The Board of Governors of the Federal Reserve System, the Federal Reserve banks, and the individual member banks undergo regular audits by the GAO and an outside auditor. GAO audits are limited and do not cover "most of the Fed’s monetary policy actions or decisions, including discount window lending (direct loans to financial institutions), open-market operations and any other transactions made under the direction of the Federal Open Market Committee" ...[nor may the GAO audit] "dealings with foreign governments and other central banks." <ref>{{cite news|last=Reddy |first=Sudeep |date=August 31, 2009 August 31, 2009 |url=http://blogs.wsj.com/economics/2009/08/31/what-would-a-federal-reserve-audit-show/tab/article/ |title=What would a federal reserve audit show |publisher=The Wall Street Journal |accessdate=August 29, 2011}}</ref>  Various statutory changes, including the [[Federal Reserve Transparency Act]], have been proposed to broaden the scope of the audits.

November 7, 2008, [[Bloomberg L.P.]] News brought [[Bloomberg L.P. v. Board of Governors of the Federal Reserve System|a lawsuit]] against the Board of Governors of the Federal Reserve System to force the Board to reveal the identities of firms for which it has provided guarantees during the [[Late-2000s financial crisis]].<ref>[http://www.cjr.org/the_audit/bloomberg_wins_its_lawsuit_aga.php]</ref> Bloomberg, L.P. won at the trial court<ref>Docket entry 31, ''Bloomberg, L.P. v. Board of Governors of the Federal Reserve System'', case no. 1:08-cv-09595-LAP, U.S. District Court for the District of New York.</ref> and the Fed's appeals were rejected at both the [[United States Court of Appeals for the Second Circuit]] and the [[U.S. Supreme Court]]. The data  was released March 31, 2011.<ref>{{cite news |last=Keoun,Kuntz,Benedetti-Valentini,Buhayar,Campbell,Condon,Finch,Frye,Griffin,Harper,Hyuga,Ivry,Kirchfeld,Kopecki,Layne,Logutenkova,Martens,Moore,Mustoe,Son,Sterngold |title=The Fed’s Secret Liquidity Lifelines|url=http://www.bloomberg.com/data-visualization/federal-reserve-emergency-lending/#/overview/?sort=nomPeakValue&group=none&view=peak&position=0&comparelist=&search= |accessdate=March 17, 2012 |newspaper=Bloomberg}}</ref><ref>{{cite news |last=Torres |first=Craig |title=Fed Releases Discount-Window Loan Records Under Court Order |url=http://www.businessweek.com/news/2011-03-31/fed-releases-discount-window-loan-records-under-court-order.html |accessdate=March 19, 2012 |newspaper=Businessweek |date=March 31, 2011}}</ref>

==Monetary policy==
{{Further|Monetary policy of the United States}}
The term "[[monetary policy]]" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. What happens to money and credit affects interest rates (the cost of credit) and the performance of an economy. The Federal Reserve Act of 1913 gave the Federal Reserve authority to set monetary policy in the United States.<ref name="mp">{{cite web|url=http://www.federalreserve.gov/monetarypolicy/fomc.htm |title=FRB: Federal Open Market Committee |publisher=Federalreserve.gov |date=August 22, 2011 |accessdate=August 29, 2011}}</ref><ref name="mpb">[http://www.federalreserveeducation.org/fed101_html/policy/basics_print.htm Federal Reserve Education—Monetary Policy Basics]{{dead link|date=August 2011}}</ref>

===Interbank lending is the basis of policy===
The Federal Reserve sets monetary policy by influencing the [[Federal funds rate]], which is the rate of interbank lending of [[excess reserves]]. The rate that banks charge each other for these loans is determined in the [[interbank lending market|interbank market]] but the Federal Reserve influences this rate through the three "tools" of monetary policy described in the [[Federal Reserve System#Monetary policy|''Tools'' section]] below.

The Federal Funds rate is a short-term interest rate the FOMC focuses on directly. This rate ultimately affects the longer-term interest rates throughout the economy. A summary of the basis and implementation of monetary policy is stated by the Federal Reserve:

{{quote|The Federal Reserve implements U.S. monetary policy by affecting conditions in the market for balances that depository institutions hold at the Federal Reserve Banks...By conducting [[open market operations]], imposing reserve requirements, permitting depository institutions to hold contractual clearing balances, and extending credit through its discount window facility, the Federal Reserve exercises considerable control over the demand for and supply of Federal Reserve balances and the federal funds rate. Through its control of the federal funds rate, the Federal Reserve is able to foster financial and monetary conditions consistent with its monetary policy objectives.<ref name="BoG 2005 pp=27"/>|}}

This influences the economy through its effect on the quantity of reserves that banks use to make loans. Policy actions that add reserves to the banking system encourage lending at lower interest rates thus stimulating growth in money, credit, and the economy. Policy actions that absorb reserves work in the opposite direction. The Fed's task is to supply enough reserves to support an adequate amount of money and credit, avoiding the excesses that result in inflation and the shortages that stifle economic growth.<ref>[http://www.richmondfed.org/publications/educator_resources/the_federal_reserve_system_in_action/index.cfm The Federal Reserve System In Action—Federal Reserve Bank of Richmond] {{dead link|date=August 2011}}</ref>

===Tools===
There are three main tools of monetary policy that the Federal Reserve uses to influence the amount of reserves in private banks:<ref name="mp"/>

{| class="wikitable"
|-
!Tool
!Description
|-
|[[Open market operations]]
|Purchases and sales of U.S. Treasury and federal agency securities—the Federal Reserve's principal tool for implementing monetary policy.  The Federal Reserve's objective for open market operations has varied over the years. During the 1980s, the focus gradually shifted toward attaining a specified level of the [[federal funds rate]] (the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed), a process that was largely complete by the end of the decade.<ref>{{cite web|url=http://www.federalreserve.gov/fomc/fundsrate.htm |title=FRB: Monetary Policy, Open Market Operations |publisher=Federalreserve.gov |date=January 26, 2010 |accessdate=August 29, 2011}}</ref>
|-
|Discount rate
|The interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility—the [[discount window]].<ref>{{cite web|url=http://www.federalreserve.gov/monetarypolicy/discountrate.htm |title=FRB: Monetary Policy, the Discount Rate |publisher=Federalreserve.gov |date=July 19, 2011 |accessdate=August 29, 2011}}</ref>
|-
|[[Reserve requirements]]
|The amount of funds that a depository institution must hold in reserve against specified deposit liabilities.<ref name = "reserve_req">{{cite web|url=http://www.federalreserve.gov/monetarypolicy/reservereq.htm |title=FRB: Monetary Policy, Reserve Requirements |publisher=Federalreserve.gov |date=October 26, 2010 |accessdate=August 29, 2011}}</ref>
|}

====Federal funds rate and open market operations====
{{Further|open market operations|money creation|federal funds rate}}
[[File:Federal funds effective rate 1954 to present.svg|thumb|right|375px|The effective federal funds rate charted over more than fifty years.]]

The Federal Reserve System implements [[monetary policy]] largely by targeting the [[federal funds rate]]. This is the rate that banks charge each other for overnight loans of [[federal funds]], which are the reserves held by banks at the Fed.  This rate is actually determined by the market and is not explicitly mandated by the Fed. The Fed therefore tries to align the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations. The Federal Reserve System usually adjusts the federal funds rate target by 0.25% or 0.50% at a time.

Open market operations allow the Federal Reserve to increase or decrease the amount of money in the banking system as necessary to balance the Federal Reserve's dual mandates. Open market operations are done through the sale and purchase of [[United States Treasury security]], sometimes called "Treasury bills" or more informally "T-bills" or "Treasuries". The Federal Reserve buys Treasury bills from its primary dealers. The purchase of these securities affects the federal funds rate, because primary dealers have accounts at depository institutions.<ref name="FRB of NY">{{cite web|url=http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html|title=Open Market Operations|publisher=New York Federal Reserve Bank|month=August |year= 2007 |accessdate=October 29, 2011}}</ref>

The Federal Reserve education website describes open market operations as follows:<ref name="mpb"/>

{{quote|Open market operations involve the buying and selling of U.S. government securities (federal agency and mortgage-backed). The term 'open market' means that the Fed doesn't decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an 'open market' in which the various securities dealers that the Fed does business with—the primary dealers—compete on the basis of price. Open market operations are flexible and thus, the most frequently used tool of monetary policy.

Open market operations are the primary tool used to regulate the supply of bank reserves. This tool consists of Federal Reserve purchases and sales of financial instruments, usually securities issued by the U.S. Treasury, Federal agencies and government-sponsored enterprises. Open market operations are carried out by the Domestic Trading Desk of the Federal Reserve Bank of New York under direction from the FOMC. The transactions are undertaken with primary dealers.

The Fed's goal in trading the securities is to affect the federal funds rate, the rate at which banks borrow reserves from each other. When the Fed wants to increase reserves, it buys securities and pays for them by making a deposit to the account maintained at the Fed by the primary dealer's bank. When the Fed wants to reduce reserves, it sells securities and collects from those accounts. Most days, the Fed does not want to increase or decrease reserves permanently so it usually engages in transactions reversed within a day or two. That means that a reserve injection today could be withdrawn tomorrow morning, only to be renewed at some level several hours later. These short-term transactions are called repurchase agreements (repos) – the dealer sells the Fed a security and agrees to buy it back at a later date.}}

=====Repurchase agreements=====
{{Further|repurchase agreement}}
To smooth temporary or cyclical changes in the money supply, the desk engages in [[repurchase agreement]]s (repos) with its primary dealers.  Repos are essentially secured, short-term lending by the Fed.  On the day of the transaction, the Fed deposits money in a [[Primary dealers|primary dealer's]] reserve account, and receives the promised securities as [[collateral (finance)|collateral]].  When the transaction matures, the process unwinds: the Fed returns the collateral and charges the [[primary dealer]]'s reserve account for the principal and accrued interest.  The term of the repo (the time between settlement and maturity) can vary from 1 day (called an overnight repo) to 65 days.<ref>{{cite web|url=http://www.ny.frb.org/aboutthefed/fedpoint/fed04.html |title=Repurchase and Reverse Repurchase Transactions—Fedpoints—Federal Reserve Bank of New York |publisher=Ny.frb.org |month=August |year=2007 |accessdate=August 29, 2011}}</ref>

====Discount rate====
{{Further|discount window}}
The Federal Reserve System also directly sets the "discount rate", which is the interest rate for "discount window lending", overnight loans that member banks borrow directly from the Fed. This rate is generally set at a rate close to 100 [[basis point]]s above the target federal funds rate. The idea is to encourage banks to seek alternative funding before using the "discount rate" option.<ref>Federal Reserve Bank San Francisco( 2004)</ref>  The equivalent operation by the [[European Central Bank]] is referred to as the "[[marginal lending facility]]".<ref>{{cite journal| author = Patricia S. Pollard| journal = Review| title = A Look Inside Two Central Banks: The European Central Bank And The Federal Reserve| volume = 85| issue = 2| publisher =Federal Reserve Bank of St. Louis| month = February | year = 2003| oclc = 1569030| doi = 10.3886/ICPSR01278| pages = 11–30| ref = harv}}</ref>

Both the discount rate and the federal funds rate influence the [[prime rate]], which is usually about 3 percent higher than the federal funds rate.

====Reserve requirements====
Another instrument of monetary policy adjustment employed by the Federal Reserve System is the fractional [[reserve requirement]], also known as the required reserve ratio.<ref>{{harvnb|BoG|2005|pp=30}}</ref>  The required reserve ratio sets the balance that the Federal Reserve System requires a depository institution to hold in the Federal Reserve Banks,<ref name="BoG 2005 pp=27">{{harvnb|BoG|2005|pp=27}}</ref> which depository institutions trade in the federal funds market discussed above.<ref>{{harvnb|BoG|2005|pp=29–30}}</ref>  The required reserve ratio is set by the Board of Governors of the Federal Reserve System.<ref>{{harvnb|BoG|2005|pp=31}}</ref> The reserve requirements have changed over time and some of the history of these changes is published by the Federal Reserve.<ref name="hist_resreq">{{cite journal|url=http://www.federalreserve.gov/monetarypolicy/0693lead.pdf |first=Joshua N. |last=Feinman |title=Reserve Requirements: History, Current Practice, and Potential Reform |format=PDF |journal=Federal Reserve Bulletin |pages=569–589 |month=June |year=1993 |accessdate=August 29, 2011}}</ref>

{| class="wikitable" frame="VOID" rules="NONE" frame="VOID" rules="NONE"
|-
|+ Reserve Requirements in the U.S. Federal Reserve System<ref name = "reserve_req"/>
|- style="text-align:center;" 
| rowspan="2"  style="height:32px; width:250px; "| '''Liability Type'''
| colspan="2"  style="width:80px; "| '''Requirement'''
|- style="text-align:left;" 
|| '''Percentage of liabilities'''
|| '''Effective date'''
|-
| colspan="3"  style="height:17px; text-align:LEFT;"| Net transaction accounts
|-
|  style="height:17px; text-align:RIGHT;"| $0 to $11.5 million
| style="text-align:center;"| 0
| style="text-align:center;"| December 29, 2011
|-
|  style="height:17px; text-align:RIGHT;"| More than $11.5 million to $71 million
| style="text-align:center;"| 3
| style="text-align:center;"| December 29, 2011
|-
|  style="height:17px; text-align:RIGHT;"| More than $71 million
| style="text-align:center;"| 10
| style="text-align:center;"| December 29, 2011
|-
| colspan=3 | <br />
|-
|  style="height:17px; text-align:LEFT;"| Nonpersonal time deposits
| style="text-align:center;"| 0
| style="text-align:center;"| December 27, 1990
|-
| colspan=3 | <br />
|-
|  style="height:17px; text-align:LEFT;"| Eurocurrency liabilities
| style="text-align:center;"| 0
| style="text-align:center;"| December 27, 1990
|}

As a response to the financial crisis of 2008, the Federal Reserve now makes interest payments on depository institutions' required and excess reserve balances.  The payment of interest on excess reserves gives the central bank greater opportunity to address credit market conditions while maintaining the federal funds rate close to the target rate set by the FOMC.<ref>{{cite web|url=http://www.federalreserve.gov/monetarypolicy/20081006a.htm |title=FRB: Press Release-Board announces that it will begin to pay interest on depository institutions required and excess reserve balances-October 6, 2008 |publisher=Federal Reserve |date=October 6, 2008 |accessdate=August 29, 2011}}</ref>

====New facilities====
In order to address problems related to the [[subprime mortgage crisis]] and [[United States housing bubble]], several new tools have been created.  The first new tool, called the [[Term Auction Facility]], was added on December 12, 2007. It was first announced as a temporary tool<ref name="taffaq"/> but there have been suggestions that this new tool may remain in place for a prolonged period of time.<ref>{{cite web|url=http://www.federalreserve.gov/newsevents/press/monetary/20071221b.htm |title=FRB: Press Release-Federal Reserve intends to continue term TAF auctions as necessary |publisher=Federalreserve.gov |date=December 21, 2007 |accessdate=August 29, 2011}}</ref>  Creation of the second new tool, called the [[Term Securities Lending Facility]], was announced on March 11, 2008.<ref name="tslfannounce">{{cite web|title=FRB press release: Announcement of the creation of the Term Securities Lending Facility|url=http://federalreserve.gov/newsevents/press/monetary/20080311a.htm |publisher=Federal Reserve |date=March 11, 2008 |accessdate=August 29, 2011}}</ref>  The main difference between these two facilities is that the Term Auction Facility is used to inject cash into the banking system whereas the Term Securities Lending Facility is used to inject [[Treasury security|treasury securities]] into the banking system.<ref>{{cite news|url=http://www.bloomberg.com/apps/news?pid=20601103&sid=a6aFI7RKVhEA&refer=news|title=Fed Seeks to Limit Slump by Taking Mortgage Debt |date=March 12, 2008|publisher=bloomberg.com}} "The step goes beyond past initiatives because the Fed can now inject liquidity without flooding the banking system with cash...Unlike the newest tool, the past steps added cash to the banking system, which affects the Fed's benchmark interest rate...By contrast, the TSLF injects liquidity by lending Treasuries, which doesn't affect the federal funds rate. That leaves the Fed free to address the mortgage crisis directly without concern about adding more cash to the system than it wants"</ref>  Creation of the third tool, called the [[Primary Dealer Credit Facility]] (PDCF), was announced on March 16, 2008.<ref>{{cite web|url=http://www.newyorkfed.org/newsevents/news/markets/2008/rp080316.html |title=Federal Reserve Announces Establishment of Primary Dealer Credit Facility—Federal Reserve Bank of New York |publisher=Newyorkfed.org |date=March 16, 2008 |accessdate=August 29, 2011}}</ref>  The PDCF was a fundamental change in Federal Reserve policy because now the Fed is able to lend directly to [[primary dealer]]s, which was previously against Fed policy.<ref>{{cite news|last=Lanman |first=Scott |url=http://www.bloomberg.com/apps/news?pid=20601068&sid=a7VHAq.o6kwU |title=Fed Says Securities Firms Borrow $28.8 Bln With New Financing |publisher=Bloomberg.com |date=March 20, 2008 |accessdate=August 29, 2011}}</ref> The differences between these three new facilities is described by the Federal Reserve:<ref name=pdcffaq>{{cite web|url=http://www.newyorkfed.org/markets/pdcf_faq.html |title=Primary Dealer Credit Facility: Frequently Asked Questions—Federal Reserve Bank of New York |publisher=Newyorkfed.org |date=February 3, 2009 |accessdate=August 29, 2011}}</ref>

{{quote|The Term Auction Facility program offers term funding to depository institutions via a bi-weekly auction, for fixed amounts of credit. The Term Securities Lending Facility will be an auction for a fixed amount of lending of Treasury general collateral in exchange for OMO-eligible and AAA/Aaa rated private-label residential mortgage-backed securities. The Primary Dealer Credit Facility now allows eligible primary dealers to borrow at the existing Discount Rate for up to 120 days.}}

Some of the measures taken by the Federal Reserve to address this mortgage crisis have not been used since [[The Great Depression]].<ref>{{cite news|url=http://www.cnbc.com/id/23664032/ |title=Fed Announces Emergency Steps to Ease Credit Crisis – Economy |agency=Reuters |publisher=Cnbc.com |date=March 17, 2008 |accessdate=August 29, 2011}}</ref>  The Federal Reserve gives a brief summary of these new facilities:<ref>{{cite web|url=http://www.frbatlanta.org/invoke.cfm?objectid=526AFBC6-5056-9F12-120FEABD6D2ADA91&method=display_body |title=Federal Reserve Bank of Atlanta—Examining the Federal Reserve's New Liquidity Measures |publisher=Frbatlanta.org |date=April 15, 2008 |accessdate=August 29, 2011}}</ref>

{{quote|As the economy has slowed in the last nine months and credit markets have become unstable, the Federal Reserve has taken a number of steps to help address the situation. These steps have included the use of traditional monetary policy tools at the macroeconomic level as well as measures at the level of specific markets to provide additional liquidity.

The Federal Reserve's response has continued to evolve since pressure on credit markets began to surface last summer, but all these measures derive from the Fed's traditional open market operations and discount window tools by extending the term of transactions, the type of collateral, or eligible borrowers.}}

A fourth facility, the Term Deposit Facility, was announced December 9, 2009, and approved April 30, 2010, with an effective date of June 4, 2010.<ref>"Reserve Requirements of Depository Institutions Policy on Payment System Risk," [http://www.gpo.gov/fdsys/pkg/FR-2010-05-05/pdf/2010-10483.pdf 75 Federal Register 86 (May 5, 2010), pp. 24384 – 24389.]</ref>  The Term Deposit Facility allows Reserve Banks to offer term deposits to institutions that are eligible to receive earnings on their balances at Reserve Banks.  Term deposits are intended to facilitate the implementation of monetary policy by providing a tool by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions.  Funds placed in term deposits are removed from the accounts of participating institutions for the life of the term deposit and thus drain reserve balances from the banking system.

=====Term auction facility=====
{{Further|Term auction facility}}
The Term Auction Facility is a program in which the Federal Reserve auctions term funds to depository institutions.<ref name="taffaq">{{cite web|url=http://www.federalreserve.gov/monetarypolicy/taffaq.htm |title=FRB: Temporary Auction Facility FAQ |publisher=Federalreserve.gov |date=January 12, 2009 |accessdate=August 29, 2011}}</ref>  The creation of this facility was announced by the Federal Reserve on December 12, 2007, and was done in conjunction with the [[Bank of Canada]], the [[Bank of England]], the [[European Central Bank]], and the [[Swiss National Bank]] to address elevated pressures in short-term funding markets.<ref name="taf">{{cite news|url=http://www.federalreserve.gov/newsevents/press/monetary/20071212a.htm|title=Announcement of the creation of the Term Auction Facility—FRB: Press Release—Federal Reserve and other central banks announce measures designed to address elevated pressures in short-term funding markets|date=December 12, 2007|publisher=federalreserve.gov}}</ref>  The reason it was created is because banks were not lending funds to one another and banks in need of funds were refusing to go to the discount window.  Banks were not lending money to each other because there was a fear that the loans would not be paid back.  Banks refused to go to the discount window because it is usually associated with the stigma of bank failure.<ref>{{cite news|url=http://www.ft.com/cms/s/66db756a-de5d-11dc-9de3-0000779fd2ac.html|title=US banks borrow $50bn via new Fed facility|date=February 18, 2008|publisher=Financial Times|quote=Before its introduction, banks either had to raise money in the open market or use the so-called "discount window" for emergencies. However, last year many banks refused to use the discount window, even though they found it hard to raise funds in the market, because it was associated with the stigma of bank failure}}</ref><ref>{{cite news|url=http://www.bloomberg.com/apps/news?pid=20601103&refer=news&sid=aBPbErlft9cI|title=Fed Boosts Next Two Special Auctions to $30 Billion|date=January 4, 2008|publisher=Bloomberg|quote=The Board of Governors of the Federal Reserve System established the temporary Term Auction Facility, dubbed TAF, in December to provide cash after interest-rate cuts failed to break banks' reluctance to lend amid concern about losses related to subprime mortgage securities. The program will make funding from the Fed available beyond the 20 authorized primary dealers that trade with the central bank}}</ref><ref>{{cite news|publisher=economist.com |title=A dirty job, but someone has to do it |url=http://www.economist.com/displaystory.cfm?story_id=10286586 |date=December 13, 2007|quote=The Fed's discount window, for instance, through which it lends direct to banks, has barely been approached, despite the soaring spreads in the interbank market.  The quarter-point cuts in its federal funds rate and discount rate on December 11 were followed by a steep sell-off in the stockmarket...The hope is that by extending the maturity of central-bank money, broadening the range of collateral against which banks can borrow and shifting from direct lending to an auction, the central bankers will bring down spreads in the one- and three-month [[money market]]s. There will be no net addition of liquidity. What the central bankers add at longer-term maturities, they will take out in the overnight market.

But there are risks. The first is that, for all the fanfare, the central banks' plan will make little difference. After all, it does nothing to remove the fundamental reason why investors are worried about lending to banks. This is the uncertainty about potential losses from subprime mortgages and the products based on them, and—given that uncertainty—the banks' own desire to hoard capital against the chance that they will have to strengthen their balance sheets.|accessdate=August 29, 2011}}</ref>
<ref>{{cite news|publisher=economist.com|title=Unclogging the system|url= http://www.economist.com/daily/news/displaystory.cfm?story_id=10278482&top_story=1 |date=December 13, 2007|accessdate=August 29, 2011}}</ref>  Under the Term Auction Facility, the identity of the banks in need of funds is protected in order to avoid the stigma of bank failure.<ref name="mwtaf">{{cite web|url=http://www.marketwatch.com/news/story/fed-top-central-banks-flood/story.aspx?guid=%7b6FAFC482-F8E4-4F23-A021-52DC7DE8938C%7d&print=true&dist=printTop |first=Greg |last=Robb |title=Fed, top central banks to flood markets with cash |publisher=Marketwatch.com |date=December 12, 2007 |accessdate=August 29, 2011}}</ref> [[Central bank liquidity swap|Foreign exchange swap lines]] with the [[European Central Bank]] and [[Swiss National Bank]] were opened so the banks in Europe could have access to [[U.S. dollar]]s.<ref name="mwtaf"/>  Federal Reserve Chairman Ben Bernanke briefly described this facility to the U.S. House of Representatives on January 17, 2008:

{{quote|the Federal Reserve recently unveiled a term auction facility, or TAF, through which prespecified amounts of discount window credit can be auctioned to eligible borrowers.  The goal of the TAF is to reduce the incentive for banks to hoard cash and increase their willingness to provide credit to households and firms...TAF auctions will continue as long as necessary to address elevated pressures in short-term funding markets, and we will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives.<ref>Chairman Ben S. Bernanke—The economic outlook Before the Committee on the Budget, U.S. House of Representatives January 17, 2008: http://www.federalreserve.gov/newsevents/testimony/bernanke20080117a.htm</ref>}}
It is also described in the ''Term Auction Facility FAQ''<ref name="taffaq"/>{{quote|The TAF is a credit facility that allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help ensure that liquidity provisions can be disseminated efficiently even when the unsecured interbank markets are under stress.

In short, the TAF will auction term funds of approximately one-month maturity. All depository institutions that are judged to be in sound financial condition by their local Reserve Bank and that are eligible to borrow at the discount window are also eligible to participate in TAF auctions. All TAF credit must be fully collateralized. Depositories may pledge the broad range of collateral that is accepted for other Federal Reserve lending programs to secure TAF credit. The same collateral values and margins applicable for other Federal Reserve lending programs will also apply for the TAF.}}

=====Term securities lending facility=====
The Term Securities Lending Facility is a 28-day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York's primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.<ref name="tslffaq">Term Securities Lending Facility: Frequently Asked Questions: http://www.newyorkfed.org/markets/tslf_faq.html</ref>  Like the Term Auction Facility, the TSLF was done in conjunction with the [[Bank of Canada]], the [[Bank of England]], the [[European Central Bank]], and the [[Swiss National Bank]].  The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable.  It is anticipated by Federal Reserve officials that the primary dealers, which include Goldman Sachs Group. Inc., J.P. Morgan Chase, and Morgan Stanley, will lend the Treasuries on to other firms in return for cash. That will help the dealers finance their balance sheets.{{Citation needed|date=September 2010}} The currency swap lines with the [[European Central Bank]] and [[Swiss National Bank]] were increased.

=====Primary dealer credit facility=====
The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that will provide funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally.<ref name=pdcffaq/>  This new facility marks a fundamental change in Federal Reserve policy because now [[primary dealer]]s can borrow directly from the Fed when this previously was not permitted.

=====Interest on reserves=====
{{As of|2008|10}}, the Federal Reserve banks will pay interest on reserve balances (required & excess) held by depository institutions. The rate is set at the lowest federal funds rate during the reserve maintenance period of an institution, less 75[[basis point|bp]].<ref>{{cite web|url=http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm|title=Interest on Required Reserve Balances and Excess Balances|publisher=Federal Reserve Board|date=October 6, 2008|accessdate=October 14, 2008}}</ref> As of October 23, 2008, the Fed has lowered the spread to a mere 35 bp.<ref>{{cite web|url=http://www.federalreserve.gov/newsevents/press/monetary/20081022a.htm|title=Press Release – October 22, 2008|publisher=Federal Reserve Board|date=October 22, 2008|accessdate=October 22, 2008}}</ref>

=====Term deposit facility=====
The Term Deposit Facility is a program through which the Federal Reserve Banks will offer interest-bearing term deposits to eligible institutions.   By removing "excess deposits" from participating banks, the overall level of reserves available for lending is reduced, which should result in increased market interest rates, acting as a brake on economic activity and inflation.  The Federal Reserve has stated that:

{{quote| Term deposits will be one of several tools that the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy.  The development of the TDF is a matter of prudent planning and has no implication for the near-term conduct of monetary policy.<ref>{{cite web|url=http://www.federalreserve.gov/newsevents/press/monetary/20100430a.htm |title=Federal Reserve Board approves amendments to Regulation D authorizing Reserve Banks to offer term deposits |publisher=Federalreserve.gov |date=April 30, 2010 |accessdate=August 29, 2011}}</ref>}}

The Federal Reserve initially authorized up to five "small-value offerings are designed to ensure the effectiveness of TDF operations and to provide eligible institutions with an opportunity to gain familiarity with term deposit procedures."<ref>{{cite web|url=http://www.federalreserve.gov/newsevents/press/monetary/20100510b.htm |title=Board authorizes small-value offerings of term deposits under the Term Deposit Facility |publisher=Federalreserve.gov |date=May 10, 2010 |accessdate=August 29, 2011}}</ref>  After three of the offering auctions were successfully completed, it was announced that small-value auctions would continue on an on-going basis.<ref>{{cite web|url=http://www.federalreserve.gov/newsevents/press/monetary/20100908a.htm |title=Board authorizes ongoing small-value offerings of term deposits under the Term Deposit Facility |publisher=Federalreserve.gov |date=September 8, 2010 |accessdate=August 29, 2011}}</ref>

The Term Deposit Facility is essentially a tool available to reverse the efforts that have been employed to provide liquidity to the financial markets and to reduce the amount of capital available to the economy.  As stated in Bloomberg News:

{{quote| Policy makers led by Chairman Ben S. Bernanke are preparing for the day when they will have to start siphoning off more than $1 trillion in excess reserves from the banking system to contain inflation. The Fed is charting an eventual return to normal monetary policy, even as a weakening near-term outlook has raised the possibility it may expand its balance sheet.<ref>{{cite news
  | last = Zumbrun
  | first = Joshua
  | title = Fed to Sell Term Deposits to Ensure Exit 'Readiness'
  | work = Bloomberg
  | date = September 8, 2010
  | url = http://www.bloomberg.com/news/2010-09-08/fed-to-sell-5-billion-of-term-deposits-to-ensure-readiness-.html
  | accessdate = September 10, 2010}}
</ref> }}

Chairman Ben S. Bernanke, testifying before House Committee on Financial Services, described the Term Deposit Facility and other facilities to Congress in the following terms:

{{quote| Most importantly, in October 2008 the Congress gave the Federal Reserve statutory authority to pay interest on balances that banks hold at the Federal Reserve Banks.  By increasing the interest rate on banks' reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates, as banks will not supply short-term funds to the money markets at rates significantly below what they can earn by holding reserves at the Federal Reserve Banks.  Actual and prospective increases in short-term interest rates will be reflected in turn in higher longer-term interest rates and in tighter financial conditions more generally....

As an additional means of draining reserves, the Federal Reserve is also developing plans to offer to depository institutions term deposits, which are roughly analogous to certificates of deposit that the institutions offer to their customers.  A proposal describing a term deposit facility was recently published in the Federal Register, and the Federal Reserve is finalizing a revised proposal in light of the public comments that have been received.  After a revised proposal is reviewed by the Board, we expect to be able to conduct test transactions this spring and to have the facility available if necessary thereafter.  The use of reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so.

When these tools are used to drain reserves from the banking system, they do so by replacing bank reserves with other liabilities; the asset side and the overall size of the Federal Reserve's balance sheet remain unchanged.  If necessary, as a means of applying monetary restraint, the Federal Reserve also has the option of redeeming or selling securities.  The redemption or sale of securities would have the effect of reducing the size of the Federal Reserve's balance sheet as well as further reducing the quantity of reserves in the banking system. Restoring the size and composition of the balance sheet to a more normal configuration is a longer-term objective of our policies.  In any case, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments and on our best judgments about how to meet the Federal Reserve's dual mandate of maximum employment and price stability.

In sum, in response to severe threats to our economy, the Federal Reserve created a series of special lending facilities to stabilize the financial system and encourage the resumption of private credit flows to American families and businesses.  As market conditions and the economic outlook have improved, these programs have been terminated or are being phased out.  The Federal Reserve also promoted economic recovery through sharp reductions in its target for the federal funds rate and through large-scale purchases of securities. The economy continues to require the support of accommodative monetary policies.  However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus.  We have full confidence that, when the time comes, we will be ready to do so.<ref>[http://financialservices.house.gov/Hearings/hearingDetails.aspx?NewsID=1087 Testimony before the House Committee on Financial Services regarding "Unwinding Emergency Federal Reserve Liquidity Programs and Implications for Economic Recovery." March 25, 2010.], also at [http://frwebgate.access.gpo.gov/cgi-bin/useftp.cgi?IPaddress=162.140.64.184&filename=56764.pdf&directory=/diska/wais/data/111_house_hearings GPO Access Serial No. 111–118] Retrieved September 10, 2010</ref>}}

=====Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility=====

The Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF) was also called the AMLF. The Facility began operations on September 22, 2008, and was closed on February 1, 2010.<ref>{{Cite document|title=Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility|url=http://www.federalreserve.gov/monetarypolicy/abcpmmmf.htm|publisher=Board of Governors of the Federal Reserve System|postscript=<!--None-->|accessdate=May 27, 2010|ref=harv}}</ref>

All U.S. depository institutions, bank holding companies (parent companies or U.S. broker-dealer affiliates), or U.S. branches and agencies of foreign banks were eligible to borrow under this facility pursuant to the discretion of the FRBB.

Collateral eligible for pledge under the Facility was required to meet the following criteria:
*was purchased by Borrower on or after September 19, 2008 from a registered investment company that held itself out as a money market mutual fund;
*was purchased by Borrower at the Fund's acquisition cost as adjusted for amortization of premium or accretion of discount on the ABCP through the date of its purchase by Borrower;
*was rated at the time pledged to FRBB, not lower than A1, F1, or P1 by at least two major rating agencies or, if rated by only one major rating agency, the ABCP must have been rated within the top rating category by that agency;
*was issued by an entity organized under the laws of the United States or a political subdivision thereof under a program that was in existence on September 18, 2008; and
*had a stated maturity that did not exceed 120 days if the Borrower was a bank or 270 days for non-bank Borrowers.

=====Commercial Paper Funding Facility=====
On October 7, 2008, the Federal Reserve further expanded the collateral it will loan against to include [[commercial paper]] using the new [[Commercial Paper Funding Facility]] (CPFF). The action made the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms.  Fed officials said they'll buy as much of the debt as necessary to get the market functioning again. They refused to say how much that might be, but they noted that around $1.3 trillion worth of commercial paper would qualify. There was $1.61 trillion in outstanding commercial paper, seasonally adjusted, on the market as of October 1, 2008, according to the most recent data from the Fed. That was down from $1.70 trillion in the previous week. Since the summer of 2007, the market has shrunk from more than $2.2 trillion.<ref>[http://biz.yahoo.com/ap/081007/financial_meltdown.html Fed Action] {{dead link|date=August 2011}}</ref> This program lent out a total $738 billion before it was closed. Forty-five out of 81 of the companies participating in this program were foreign firms. Research shows that [[Troubled Asset Relief Program]] (TARP) recipients were twice as likely to participate in the program than other commercial paper issuers who did not take advantage of the TARP bailout. The Fed incurred no losses from the CPFF.<ref>{{cite journal|last=Wilson |first=Linus |last2=Wu |first2=Yan|title=Does Receiving TARP Funds Make it Easier to Roll Your Commercial Paper Onto the Fed? |date=August 22, 2011 |ssrn=1911454 |publisher=Social Science Electronic Publishing}}</ref>

====Quantitative policy====
A little-used tool of the Federal Reserve is the ''quantitative policy''. With that the Federal Reserve actually buys back corporate bonds and mortgage backed securities held by banks or other financial institutions. This in effect puts money back into the financial institutions and allows them to make loans and conduct normal business. The Federal Reserve Board used this policy in the early 1990s when the U.S. economy experienced the [[savings and loan crisis]].{{Citation needed|date=October 2010}}

The bursting of the [[United States housing bubble]] prompted the Fed to buy mortgage-backed securities for the first time in November 2008. Over six weeks, a total of $1.25 trillion were purchased in order stabilize the housing market, about one-fifth of all U.S. government-backed mortgages.<ref>{{cite web |url=http://www.npr.org/templates/transcript/transcript.php?storyId=129451895 |title=Federal Reserve Mortgage Purchase Program: Planet Money |publisher=NPR |date=August 26, 2010 |accessdate=August 29, 2011}}</ref>

==History==

===Central banking in the United States===
{{Main|History of central banking in the United States}}
In 1690, the [[Massachusetts Bay Colony]] became the first to issue paper money in what would become the United States, but soon others began printing their own money as well. The demand for currency in the colonies was due to the scarcity of coins, which had been the primary means of trade.<ref name="A Brief History of Our Nation's Paper Money"/> Colonies' paper currencies were used to pay for their expenses, as well as a means to lend money to the colonies' citizens. Paper money quickly became the primary means of exchange within each colony, and it even began to be used in financial transactions with other colonies.<ref name="Benjamin Franklin And the Birth of a Paper Money Economy">{{cite web |url=http://www.philadelphiafed.org/publications/economic-education/ben-franklin-and-paper-money-economy.pdf |format=PDF |title=Benjamin Franklin And the Birth of a Paper Money Economy |last=Grubb |first=Farley |publisher=Federal Reserve Bank of Philadelphia |date=March 30, 2006 |accessdate=August 26, 2010}}</ref> However, some of the currencies were not redeemable in gold or silver, which caused them to depreciate.<ref name="A Brief History of Our Nation's Paper Money">{{cite web |url=http://www.frbsf.org/publications/federalreserve/annual/1995/history.html |title=1995 Annual Report: A Brief History of Our Nation's Paper Money |last=Flamme |first=Karen |publisher=Federal Reserve Bank of San Francisco |accessdate=August 26, 2010}}</ref> The Currency Act of 1751 set limits on the issuance of Bills of Credit by the New England states and set requirements for the redemption of any bills issued. This Act was in response to the overissuance of bills by Rhode Island, eventually reducing their value to 1/27 of the issuing value.<ref>{{cite web|url=http://mises.org/freemarket_detail.aspx?control=336 |title=Eventually, the paper money was received for taxes at the rate of £27 in bills of credit for £1 in silver, and destroyed. |publisher=Mises.org |date= |accessdate=April 30, 2012}}</ref> The Currency Act of 1764 completely banned the issuance of Bills of Credit (paper money) in the colonies and the making of such bills legal tender because their depreciation allowed the discharge of debts with depreciated paper at a rate less than contracted for, to the great discouragement and prejudice of the trade and commerce of his Majesty's subjects. The ban proved extremely harmful to the economy of the colonies and inhibited trade, both within the colonies and abroad.<ref>[http://www.carolana.com/SC/Royal_Colony/The_Currency_Act_1764.html "The Currency Act of 1764"]. ''The Royal Colony of South Carolina''. carolana.com. Retrieved January 3, 2012. "This act was not repealed prior to the American Revolution. It had very dire consequences for both North Carolina and South Carolina, both of whose economies were already shaky. The Currency Act was, therefore, a great hardship to trade within and without the colonies and, equally important, proof that the British government put the interests of mother country merchants ahead of theirs.&nbsp;... The entire text of the Act is provided below." "...and whereas such bills of credit have greatly depreciated in their value, by means whereof debts have been discharged with a much less value than was contracted for, to the great discouragement and prejudice of the trade and commerce of his Majesty's subjects...no act, order, resolution, or vote of assembly, in any of his Majesty's colonies or plantations in America, shall be made, for creating or issuing any paper bills, or bills of credit of any kind or denomination whatsoever, declaring such paper bills, or bills of credit, to be legal tender in payment of any bargains, contracts, debts, dues, or demands whatsoever; and every clause or provision which shall hereafter be inserted in any act, order, resolution, or vote of assembly, contrary to this act, shall be null and void."</ref>

The first attempt at a national currency was during the [[American Revolutionary War]]. In 1775 the Continental Congress, as well as the states, began issuing paper currency, calling the bills "[[Early American currency|Continentals]]". The Continentals were backed only by future tax revenue, and were used to help finance the Revolutionary War. Overprinting, as well as British counterfeiting caused the value of the Continental to diminish quickly. This experience with paper money led the United States to strip the power to issue Bills of Credit (paper money) from a draft of the new Constitution on August 16, 1787.<ref>{{cite web|url=http://avalon.law.yale.edu/18th_century/debates_816.asp |title="Mr. Govr. MORRIS moved to strike out "and emit bills on the credit of the U. States"-If the United States had credit such bills would be unnecessary: if they had not, unjust & useless. ... On the motion for striking out N. H. ay. Mas. ay. Ct ay. N. J. no. Pa. ay. Del. ay. Md. no. Va. ay. N. C. ay. S. C. ay. Geo. ay." |publisher=Avalon.law.yale.edu |date= |accessdate=April 30, 2012}}</ref> as well as banning such issuance by the various states, and limiting the states ability to make anything but gold or silver coin legal tender.<ref>US Constitution Article 1, Section 10. "no state shall ..emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;"</ref>

In 1791, the government granted the [[First Bank of the United States]] a charter to operate as the U.S. central bank until 1811.<ref name="A Brief History of Our Nation's Paper Money"/> The First Bank of the United States came to an end under [[James Madison|President Madison]] because Congress refused to renew its charter. The [[Second Bank of the United States]] was established in 1816, and lost its authority to be the central bank of the U.S. twenty years later under [[Andrew Jackson|President Jackson]] when its charter expired. Both banks were based upon the [[Bank of England]].<ref>{{cite book|url=http://books.google.ca/books?hl=en&id=EkUTaZofJYEC&dq=British+Parliamentary+reports+on+international+finance&printsec=frontcover&source=web&ots=kHxssmPNow&sig=UyopnsiJSHwk152davCIyQAMVdw&sa=X&oi=book_result&resnum=1&ct=result#PPA25,M1 |publisher=Ayer Publishing |year=1978 |title=British Parliamentary reports on international finance: the Cunliffe Committee and the Macmillan Committee reports |isbn=978-0-405-11212-6 |quote=description of the founding of Bank of England: 'Its foundation in 1694 arose out the difficulties of the Government of the day in securing subscriptions to State loans. Its primary purpose was to raise and lend money to the State and in consideration of this service it received under its Charter and various Act of Parliament, certain privileges of issuing bank notes. The corporation commenced, with an assured life of twelve years after which the Government had the right to annul its Charter on giving one year's notice. Subsequent extensions of this period coincided generally with the grant of additional loans to the State'}}</ref> Ultimately, a third national bank, known as the Federal Reserve, was established in 1913 and still exists to this day.

====Timeline of central banking in the United States====
*1791–1811: [[First Bank of the United States]]
*1811–1816: No central bank
*1816–1836: [[Second Bank of the United States]]
*1837–1862: Free Bank Era
*1846–1921: [[Independent Treasury System]]
*1863–1913: National Banks
*1913 – present: Federal Reserve System
:Sources: {{cite web |url=http://www.federalreserve.gov/BoardDocs/Speeches/1998/19980502.htm |title=Remarks by Chairman Alan Greenspan – "Our banking history" |date=May 2, 1998}} {{cite web |url=http://www.federalreserveeducation.org/about%2Dthe%2Dfed/history |title=History of the Federal Reserve}} {{cite book |url=http://www.bos.frb.org/about/pubs/begin.pdf |title=Historical Beginnings... The Federal Reserve |year=1999 |format=PDF |chapter=Chapter 1. Early Experiments in Central Banking}}

====Creation of First and Second Central Bank====
The first U.S. institution with central banking responsibilities was the [[First Bank of the United States]], chartered by Congress and signed into law by President [[George Washington]] on February 25, 1791, at the urging of [[Alexander Hamilton]].  This was done despite strong opposition from [[Thomas Jefferson]] and [[James Madison]], among numerous others. The charter was for twenty years and expired in 1811 under President Madison, because Congress refused to renew it.<ref name="boshistory">{{cite web |url=http://www.bos.frb.org/about/pubs/begin.pdf|title=Historical Beginnings... The Federal Reserve|last=Johnson |first=Roger|month= December |year=1999|publisher=Federal Reserve Bank of Boston|page=8|accessdate=July 23, 2010}}</ref>

In 1816, however, Madison revived it in the form of the [[Second Bank of the United States]]. Years later, early renewal of the bank's charter became the primary issue in the reelection of President [[Andrew Jackson]].  After Jackson, who was opposed to the central bank, was reelected, he pulled the government's funds out of the bank.  [[Nicholas Biddle (banker)|Nicholas Biddle]], President of the Second Bank of the United States, responded by contracting the money supply to pressure Jackson to renew the bank's charter forcing the country into a recession, which the bank blamed on Jackson's policies {{Citation needed|date=January 2012}}.  Interestingly, Jackson is the only President to completely [http://online.wsj.com/article/SB123491373049303821.html pay off the national debt]. The bank's charter was not renewed in 1836. From 1837 to 1862, in the [[Free Banking Era]] there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 [[National Banking Act]]. A series of bank panics, in [[Panic of 1873|1873]], [[Panic of 1893|1893]], and [[Panic of 1907|1907]],<ref name=FDS-H-04>[http://www.u-s-history.com/pages/h952.html Panic of 1907: J.P. Morgan Saves the Day]</ref><ref name=FDS-H-05>[http://minneapolisfed.org/publications_papers/pub_display.cfm?id=3816 Born of a Panic: Forming the Fed System]</ref><ref name=FDS-H-06>[http://www.smithsonianmag.com/history-archaeology/1907_Panic.html The Financial Panic of 1907: Running from History]</ref> provided strong demand for the creation of a centralized banking system.

====Creation of Third Central Bank====
{{Main|History of the Federal Reserve System}}

The main motivation for the third central banking system came from the [[Panic of 1907]], which caused renewed demands for banking and currency reform.<ref name=FDS-H-04/><ref name=FDS-H-05/><ref name=FDS-H-06/><ref name="herrickpanic">{{cite web |url=http://links.jstor.org/sici?sici=0002-7162(190803)31%3C8%3ATPO1AS%3E2.0.CO%3B2-7|title=The Panic of 1907 and Some of Its Lessons |last=Herrick |first=Myron|month=March |year=1908|work=Annals of the American Academy of Political and Social Science |accessdate=August 29, 2011}}</ref>  During the last quarter of the 19th century and the beginning of the 20th century the United States economy went through a series of [[financial panics]].<ref name="EFlaherty"/>  According to many economists, the previous national banking system had two main weaknesses: an [[elasticity (economics)|inelastic]] currency and a lack of liquidity.<ref name="EFlaherty">{{cite web |url=http://odur.let.rug.nl/~usa/E/usbank/bank00.htm|title=A Brief History of Central Banking in the United States |last=Flaherty |first=Edward|date=June 16, 1997, updated August 24, 2001 |publisher=University of Groningen|location= Netherlands}}</ref>  In 1908, Congress enacted the [[Aldrich-Vreeland Act]], which provided for an emergency currency and established the [[National Monetary Commission]] to study banking and currency reform.<ref name="mnwarburg">{{cite web |url=http://www.minneapolisfed.org/pubs/region/89-05/reg895d.cfm|title=Paul Warburg's Crusade to Establish a Central Bank in the United States |last=Whithouse |first=Michael|month=May|year=1989 |publisher=The Federal Reserve Bank of Minneapolis |accessdate=August 29, 2011}}</ref> The National Monetary Commission returned with recommendations which were repeatedly rejected by Congress. A revision crafted during a secret meeting on [[Jekyll Island]] by Senator Aldrich and representatives of the nation's top finance and industrial groups later became the basis of the [[Federal Reserve Act]].<ref>{{cite web|url=http://www.jekyllislandhistory.com/federalreserve.shtml |title=For years members of the Jekyll Island Club would recount the story of the secret meeting and by the 1930s the narrative was considered a club tradition. |publisher=Jekyllislandhistory.com |date= |accessdate=April 30, 2012}}</ref><ref>{{cite web|url=http://fraser.stlouisfed.org/chfrs/record.php?id=5653 |title=Papers of Frank A.Vanderlip "I wish I could sit down with you and half a dozen others in the sort of conference that created the Federal Reserve Act" |format=PDF |date= |accessdate=April 30, 2012}}</ref> The House voted on December 22, 1913, with 298 yeas to 60 nays, and the Senate voted 43–25 on December 23, 1913.<ref>{{cite web|url=http://www.llsdc.org/FRA-LH/ |title=The Federal Reserve Act of 1913 - A Legislative History |publisher=Llsdc.org |date= |accessdate=April 30, 2012}}</ref> President Woodrow Wilson signed the bill later that day.<ref>{{cite web|author=|url=http://query.nytimes.com/mem/archive-free/pdf?res=9B04E3DB173DE633A25757C2A9649D946296D6CF |title=Affixes His Signature at 6:02 P.M., Using Four Gold Pens. |publisher=New York Times |date=December 24, 1913 |accessdate=April 30, 2012}}</ref>

=====Federal Reserve Act=====
{{Main|Federal Reserve Act}}
[[File:Fed Reserve.JPG|thumb|300px|Newspaper clipping, December 24, 1913]]
The head of the bipartisan National Monetary Commission was financial expert and Senate [[Republican Party (United States)|Republican]] leader [[Nelson Aldrich]]. Aldrich set up two commissions—one to study the American monetary system in depth and the other, headed by Aldrich himself, to study the European central banking systems and report on them.<ref name="mnwarburg"/> Aldrich went to Europe opposed to centralized banking, but after viewing Germany's monetary system he came away believing that a centralized bank was better than the government-issued bond system that he had previously supported.

In early November 1910, Aldrich met with five well known members of the New York banking community to devise a central banking bill. [[Paul Warburg]], an attendee of the meeting and longtime advocate of central banking in the U.S., later wrote that Aldrich was "bewildered at all that he had absorbed abroad and he was faced with the difficult task of writing a highly technical bill while being harassed by the daily grind of his parliamentary duties".<ref name="Warburg document">{{cite web |url=http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3815|title=Paul Warburg's Crusade to Establish a Central Bank in the United States|publisher=The Federal Reserve Bank of Minneapolis}}</ref> After ten days of deliberation, the bill, which would later be referred to as the "Aldrich Plan", was agreed upon. It had several key components, including a central bank with a Washington-based headquarters and fifteen branches located throughout the U.S. in geographically strategic locations, and a uniform elastic currency based on gold and commercial paper. Aldrich believed a central banking system with no political involvement was best, but was convinced by Warburg that a plan with no public control was not politically feasible.<ref name="Warburg document"/> The compromise involved representation of the public sector on the Board of Directors.<ref name="ecresearch">{{cite web |url=http://www.cooperativeindividualism.org/aier_on_conspiracy_04.html|title=America's Unknown Enemy: Beyond Conspiracy |publisher=American Institute of Economic Research}}</ref>

Aldrich's bill met much opposition from politicians. Critics charged Aldrich of being biased due to his close ties to wealthy bankers such as [[J. P. Morgan]] and [[John D. Rockefeller, Jr.]], Aldrich's son-in-law. Most Republicans favored the Aldrich Plan,<ref name="ecresearch" /> but it lacked enough support in Congress to pass because rural and western states viewed it as favoring the "eastern establishment".<ref name="mnglass">{{cite web |url=http://www.minneapolisfed.org/pubs/region/88-08/reg888a.cfm|title=Born of a panic: Forming the Federal Reserve System |date = August 1988|publisher=The Federal Reserve Bank of Minneapolis}}</ref>  In contrast, progressive Democrats favored a reserve system owned and operated by the government; they believed that public ownership of the central bank would end Wall Street's control of the American currency supply.<ref name="ecresearch" /> Conservative Democrats fought for a privately owned, yet decentralized, reserve system, which would still be free of Wall Street's control.<ref name="ecresearch" />

The original Aldrich Plan was dealt a fatal blow in 1912, when Democrats won the White House and Congress.<ref name="Warburg document" /> Nonetheless, President [[Woodrow Wilson]] believed that the Aldrich plan would suffice with a few modifications. The plan became the basis for the Federal Reserve Act, which was proposed by Senator [[Robert L. Owen|Robert Owen]] in May 1913. The primary difference between the two bills was the transfer of control of the Board of Directors (called the Federal Open Market Committee in the Federal Reserve Act) to the government.<ref name="mnglass" /><ref name="boshistory"/> The bill passed Congress on December 23, 1913,<ref>{{cite web|url=http://www.scribd.com/doc/17411624/Congressional-Record-Dec-22-1913-pg1465 |title=Congressional Record - House |page=1465 |publisher=Scribd.com |date=December 22, 1913 |accessdate=August 29, 2011}}</ref><ref>{{cite web|url=http://www.scribd.com/doc/17234309/Congressional-Record-Dec-23-1913 |title=Congressional Record - Senate |page=1468 |publisher=Scribd.com |date=December 23, 1913 |accessdate=August 29, 2011}}</ref> on a mostly partisan basis, with most Democrats voting "yea" and most Republicans voting "nay".<ref name="boshistory"/>

===Key laws===
Key laws affecting the Federal Reserve have been:<ref>{{harvnb|BoG|2005|pp=2}}</ref>
*[[Federal Reserve Act]]
*[[Glass–Steagall Act]]
*Banking Act of 1935 <!-- Unfortunately, as of right now, this redirects to a section of the FDIC page; 1/3 of the act had to do with the FDIC. -->
*[[Employment Act of 1946]]
*[[1951 Accord|Federal Reserve-Treasury Department Accord of 1951]]
*[[Bank Holding Company Act of 1956]] and the amendments of 1970
*[[Federal Reserve Reform Act of 1977]]
*[[International Banking Act of 1978]]
*[[Full Employment and Balanced Growth Act]] (1978)
*[[Depository Institutions Deregulation and Monetary Control Act]] (1980)
*[[Financial Institutions Reform, Recovery and Enforcement Act of 1989]]
*[[Federal Deposit Insurance Corporation Improvement Act of 1991]]
*[[Gramm-Leach-Bliley Act]] (1999)
*[[Financial Services Regulatory Relief Act]] (2006)
*[[Emergency Economic Stabilization Act]] (2008)
*[[Dodd-Frank Wall Street Reform and Consumer Protection Act]] (2010)

==Measurement of economic variables==
The Federal Reserve records and publishes large amounts of data. A few websites where data is published are at the Board of Governors Economic Data and Research page,<ref>{{cite web|url=http://federalreserve.gov/econresdata/default.htm |title=FRB: Economic Research & Data |publisher=Federalreserve.gov |date=August 24, 2011 |accessdate=August 29, 2011}}</ref> the Board of Governors statistical releases and historical data page,<ref>{{cite web|url=http://www.federalreserve.gov/releases/ |title=Federal Reserve Board – Statistics: Releases and Historical Data |publisher=Federalreserve.gov |date=May 10, 2010 |accessdate=August 29, 2011}}</ref> and at the St. Louis Fed's FRED (Federal Reserve Economic Data) page.<ref>{{cite web|url=http://research.stlouisfed.org/fred2/ |title=St. Louis Fed: Economic Data – FRED |publisher=Research.stlouisfed.org |date=August 20, 2011 |accessdate=August 29, 2011}}</ref>  The Federal Open Market Committee (FOMC) examines many economic indicators prior to determining monetary policy.<ref name="eco_ind">[http://www.federalreserveeducation.org/fed101_html/policy/indicators_print.htm Federal Reserve Education – Economic Indicators] {{dead link|date=August 2011}}</ref>

Some criticism involves economic data compiled by the Fed. The Fed sponsors much of the monetary economics research in the U.S., and [[Lawrence H. White]] objects that this makes it less likely for researchers to publish findings challenging the status quo.<ref>{{cite journal|last=White|first=Lawrence H. |month=August|year=2005 |url=http://econjwatch.org/articles/the-federal-reserve-system-s-influence-on-research-in-monetary-economics |title=The Federal Reserve System's Influence on Research in Monetary Economics |journal=Econ Journal Watch |volume=2|issue=2|pages=325–354|accessdate=August 29, 2011}}</ref>

===Net worth of households and nonprofit organizations===
[[File:US household and nonproft net worth 1945-2007.gif|thumb|none|500px]]
The net worth of households and nonprofit organizations in the United States is published by the Federal Reserve in a report titled, ''Flow of Funds''.<ref>[http://www.federalreserve.gov/RELEASES/z1/ FRB: Z.1 Release—Flow of Funds Accounts of the United States, Release Dates] See the pdf documents from 1945 to 2007. The value for each year is on page 94 of each document (the 99th page in a pdf viewer) and duplicated on page 104 (109th page in pdf viewer). It gives the total assets, total liabilities, and net worth. This chart is of the net worth.</ref> At the end of fiscal year 2008, this value was $51.5 trillion.

===Money supply===
{{Further|Money supply}}
[[File:Components of US Money supply (logscale).svg|thumb|right|350px|Components the U.S. money supply (currency, M1 and M2), 1960–2010]]
The most common measures are named M0 (narrowest), M1, M2, and M3. In the United States they are defined by the Federal Reserve as follows:

{| class="wikitable"
|-
!Measure
!Definition
|-
| M0
|The total of all physical [[currency]], plus accounts at the central bank that can be exchanged for physical currency.
|-
|M1
|M0 + those portions of M0 held as reserves or vault cash + the amount in [[demand account]]s ("checking" or "current" accounts).
|-
|M2
|M1 + most [[savings account]]s, [[money market account]]s, and small denomination time deposits ([[certificates of deposit]] of under $100,000).
|-
|M3
|M2 + all other CDs, deposits of [[eurodollars]] and [[repurchase agreement]]s.
|}

The Federal Reserve stopped publishing M3 statistics in March 2006, saying that the data cost a lot to collect but did not provide significantly useful information.<ref name = "prxliv">{{cite web|url=http://www.federalreserve.gov/Releases/h6/discm3.htm |title=Discontinuance of M3 |publisher=Federalreserve.gov |date=November 10, 2005 |accessdate=August 29, 2011}}</ref> The other three money supply measures continue to be provided in detail.

===Personal consumption expenditures price index===
{{Further|Personal consumption expenditures price index}}

The [[Personal consumption expenditures price index]], also referred to as simply the PCE price index, is used as one measure of the value of money. It  is a United States-wide indicator of the average increase in prices for all domestic personal consumption. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of the [[Gross Domestic Product]] in the BEA's [[National Income and Product Accounts]], personal consumption expenditures.

One of the Fed's main roles is to maintain price stability, which means that the Fed's ability to keep a low inflation rate is a long-term measure of the their success.<ref>{{harvnb|BoG|2006|pp=10}}</ref> Although the Fed is not required to maintain inflation within a specific range, their long run target for the growth of the PCE price index is between 1.5 and 2 percent.<ref>{{cite web|url=http://research.stlouisfed.org/publications/es/10/ES1033.pdf |publisher=Federal Reserve Bank of St. Louis|title=Is the Fed’s Definition of Price Stability Evolving? |date=November 9, 2010 |accessdate=February 13, 2011}}</ref> There has been debate among policy makers as to whether or not the Federal Reserve should have a specific [[inflation targeting]] policy.<ref>{{cite web|url=http://www.federalreserve.gov/Boarddocs/Speeches/2003/20030325/default.htm |title=Remarks by Governor Ben S. Bernanke - A perspective on inflation targeting |publisher=Federalreserve.gov |date=March 25, 2003 |accessdate=August 29, 2011}}</ref><ref>{{cite web|url=http://www.businessweek.com/magazine/content/05_45/b3958607.htm |title=What's The Fuss Over Inflation Targeting? |publisher=Businessweek.com |date=November 7, 2005 |accessdate=August 29, 2011}}</ref><ref>{{cite book|url=http://www.press.uchicago.edu/cgi-bin/hfs.cgi/00/16485.ctl |last=Bernanke |first=Ben S. |title=The Inflation-Targeting Debate |publisher=University of Chicago Press |year=2005 |isbn=978-0-226-04471-2 |accessdate=August 29, 2011}}</ref>

====Inflation and the economy====
{{cleanup|section|date=April 2011}}
There are two types of inflation that are closely tied to each other. [[Monetary inflation]] is an increase in the money supply. Price inflation is a sustained increase in the general level of prices, which is equivalent to a decline in the value or purchasing power of money. If the supply of money and credit increases too rapidly over many months (monetary inflation), the result will usually be price inflation. Price inflation does not always increase in direct proportion to monetary inflation; it is also affected by the velocity of money and other factors. With price inflation, a dollar buys less and less over time.

The second way that inflation can occur and the more frequent way is by an increase in the velocity of money.  This has only been measured since the mid 50's. A healthy economy usually has a velocity of 1.8 to 2.3.  If the velocity is too high, then this means that people are not holding on to their money and spending it as fast as they get it.  Inflation happens when too many dollars are chasing too few goods.  If people are spending as soon as they get it, then there are more "active" dollars in the marketplace, as opposed to sitting in a bank account.  This will also cause a price increase.<ref name="mpb"/>

The effects of monetary and price inflation include:<ref name="mpb"/>
*Price inflation makes workers worse off if their incomes don't rise as rapidly as prices.
*Pensioners living on a fixed income are worse off if their savings do not increase more rapidly than prices.
*Lenders lose because they will be repaid with dollars that aren't worth as much.
*Savers lose because the dollar they save today will not buy as much when they are ready to spend it.
*Debtors win because the dollar they borrow today will be repaid with dollars that aren't worth as much.
*Businesses and people will find it harder to plan and therefore may decrease investment in future projects.
*Owners of financial assets suffer.
*Interest rate-sensitive industries, like mortgage companies, suffer as monetary inflation drives up long-term interest rates and Federal Reserve tightening raises short-term rates.
*[[Developed market|Developed-market]] currencies become weaker against emerging markets.<ref name="GIN">{{cite news|url=http://www.bloomberg.com/news/2011-09-18/bernanke-joins-king-tolerating-more-inflation-as-economies-fail-to-revive.html|title=Bernanke Joins King Tolerating Inflation|author=Lanman, S. and Kennedy, S.|publisher=Bloomberg|date=September 19, 2011|accessdate=September 21, 2011}}</ref>

In his 1995 book ''[[The Case Against the Fed]]'', economist [[Murray N. Rothbard]] argues that price inflation is caused only by an increase in the money supply, and only banks increase the money supply, then banks, including the Federal Reserve, are the only source of inflation.

Adherents of the [[Austrian School]] of economic theory blame the [[Financial crisis of 2007–2010|economic crisis in the late 2000s]]<ref>O'Driscoll, Gerald P. Jr. (April 20, 2010). [http://online.wsj.com/article/SB10001424052748704508904575192430373566758.html "An Economy of Liars"]. ''The Wall Street Journal''. Retrieved June 23, 2010.</ref>{{Failed verification|date=February 2011}} on the Federal Reserve's policy, particularly under the leadership of [[Alan Greenspan]], of credit expansion through historically low interest rates starting in 2001, which they claim enabled the [[United States housing bubble]].

Most [[mainstream economists]] favor a low, steady rate of inflation.<ref name="econjournalwatch.org">Hummel, Jeffrey Rogers. "Death and Taxes, Including Inflation: the Public versus Economists" (January 2007).[http://econjwatch.org/articles/death-and-taxes-including-inflation-the-public-versus-economists] p.56</ref> Low (as opposed to zero or [[Deflation|negative]]) inflation may reduce the severity of economic [[recessions]] by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a [[liquidity trap]] prevents [[monetary policy]] from stabilizing the economy.<ref>"[http://www.atypon-link.com/AEAP/doi/abs/10.1257/089533003772034934 Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others]" Lars E.O.  Svensson, ''Journal of Economic Perspectives'', Volume 17, Issue 4
Fall 2003, p145-166</ref> The task of keeping the rate of inflation low and stable is usually given to [[monetary authority|monetary authorities]].

===Unemployment rate===
[[File:US Seasonal Unemployment.svg|thumb|right|400px|United States unemployment rates 1975–2010 showing variance between the fifty states]]
{{Further|Unemployment rate#United States Bureau of Labor Statistics|List of U.S. states by unemployment rate}}
One of the stated goals of monetary policy is maximum employment. The unemployment rate statistics are collected by the [[Bureau of Labor Statistics]], and like the PCE price index are used as a barometer of the nation's economic health, and thus as a measure of the success of an administration's economic policies. Since 1980, both parties have made progressive changes in the basis for calculating unemployment, so that the numbers now quoted cannot be compared directly to the corresponding rates from earlier administrations, or to the rest of the world.<ref>{{cite journal|first=Kevin |last=Phillips |url=http://mathforum.org/~josh/articles/KevinPhillips-NumbersRacket.pdf |title=Numbers Racket – Why the Economy is Worse than We Know |journal=Harper's Magazine |month=May|year=2008|pages=43–47|accessdate=August 29, 2011}}</ref>

==Budget==
{{Further|Seigniorage}}
The Federal Reserve is self-funded.  The vast majority (90%+) of Fed revenues come from open market operations, specifically the interest on the portfolio of Treasury securities as well as "capital gains/losses" that may arise from the buying/selling of the securities and their derivatives as part of Open Market Operations.  The balance of revenues come from sales of financial services (check and electronic payment processing) and discount window loans.<ref>Chicago Fed—Demonstrating Knowledge of the Fed: [http://www.chicagofed.org/education_resources/files/Demonstrating_Knowledge.ppt] {{dead link|date=August 2011}}</ref>  The Board of Governors (Federal Reserve Board) creates a budget report once per year for Congress.  There are two reports with budget information.  The one that lists the complete balance statements with income and expenses as well as the net profit or loss is the large report simply titled, "Annual Report".  It also includes data about employment throughout the system.  The other report, which explains in more detail the expenses of the different aspects of the whole system, is called "Annual Report: Budget Review".  These are comprehensive reports with many details and can be found at the Board of Governors' website under the section "Reports to Congress"<ref name=budget>{{cite web|url=http://www.federalreserve.gov/boarddocs/rptcongress/default.htm |title=Federal Reserve Board—A-Z Listing of Board Publications |publisher=Federalreserve.gov |date=August 10, 2011 |accessdate=August 29, 2011}}</ref>

==Net worth==

===Balance sheet===
One of the keys to understanding the Federal Reserve is the Federal Reserve balance sheet (or [[Balance sheet|balance statement]]).  In accordance with Section 11 of the [[Federal Reserve Act]], the [[Board of Governors]] of the Federal Reserve System publishes once each week the "Consolidated Statement of Condition of All Federal Reserve Banks" showing the condition of each Federal Reserve bank and a consolidated statement for all Federal Reserve banks.  The Board of Governors requires that excess earnings of the Reserve Banks be transferred to the Treasury as interest on Federal Reserve notes.<ref>{{cite web|url=http://www.federalreserve.gov/boarddocs/rptcongress/annual08/pdf/AR08.pdf |title=96th Annual Report 2008 Federal Reserve |publisher=Board of Governors of the Federal Reserve System |format=PDF |month=June |year=2009 |accessdate=August 29, 2011}}</ref><ref name="balance sheet">{{cite web |url=http://www.federalreserve.gov/releases/h41/Current/ |title=Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks  |accessdate=March 20, 2008 |publisher=Federal Reserve }}</ref>

Below is the [http://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm balance sheet] as of July 6, 2011 (in billions of dollars):

NOTE:  The Fed balance sheet shown in this article has assets, liabilities and net equity that do not add up correctly. The Fed balance sheet is missing the item "Reserve Balances with Federal Reserve Banks" which would make the figures balance.

{| cellpadding="5" cellspacing="5" style="float:left;"
|-
| style="vertical-align:top;" |
{|  cellpadding="5" cellspacing="0"  style="margin:auto; border:1px solid black;border-color:black;border-collapse:collapse;"
|-
! colspan="3" style="background:#ffdead;border-bottom:1px solid black;" | ASSETS:
|-
| Gold Stock
| || style="text-align:right;" | 11.04
|-
| Special Drawing Rights Certificate Acct.
| || style="text-align:right;" | 5.20
|-
| Treasury Currency Outstanding (Coin)
| || style="text-align:right;" | 43.98
|-
| Securities Held Outright
| || style="text-align:right;" | 2647.94
|-
| &nbsp;&nbsp;&nbsp;[[United States Treasury security|U.S. Treasury Securities]]
| || style="text-align:right;" | 1623.78
|-
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Bills
| || style="text-align:right;" | 18.42
|-
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Notes and Bonds, nominal
| || style="text-align:right;" | 1530.79
|-
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Notes and Bonds, inflation-indexed
| || style="text-align:right;" | 65.52
|-
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inflation Compensation
| || style="text-align:right;" | 9.04
|-
| &nbsp;&nbsp;&nbsp;[[Agency debt|Federal Agency Debt Securities]]
| || style="text-align:right;" | 115.30
|-
| &nbsp;&nbsp;&nbsp;Mortgage-Backed Securities
| || style="text-align:right;" | 908.85
|-
| Repurchase Agreements
| || style="text-align:right;" | 0
|-
| Loans
| || style="text-align:right;" | 12.74
|-
| Primary Credit
| || style="text-align:right;" | 12
|-
| Secondary Credit
| || style="text-align:right;" | 0
|-
| Seasonal Credit
| || style="text-align:right;" | 53
|-
| &nbsp;&nbsp;&nbsp;Credit Extended to AIG Inc.
| || style="text-align:right;" | 0
|-
| &nbsp;&nbsp;&nbsp;[[Term Asset-Backed Securities Loan Facility]]
| || style="text-align:right;" | 12.67
|-
| &nbsp;&nbsp;&nbsp;Other Credit Extended
| || style="text-align:right;" | 0
|-
| [[Commercial Paper Funding Facility]] LLC
| || style="text-align:right;" | 0
|-
| [[Maiden Lane Transactions|Net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC]]
| || style="text-align:right;" | 60.32
|-
| Preferred Interest in AIG Life-Insurance Subsidiaries
| || style="text-align:right;" | 0
|-
| Net Holdings of [[Term Asset-Backed Securities Loan Facility|TALF LLC]]
| || style="text-align:right;" | 0.75
|-
| Float
| || style="text-align:right;" | -1.05
|-
| [[Central Bank Liquidity Swap]]s
| || style="text-align:right;" | 0
|-
| Other Assets
| || style="text-align:right;" | 133.56
|-
! style="text-align:left" | Total Assets
|
! style="text-align:right;" | 2914.51
|}
| style="vertical-align:top;" |
{|  cellpadding="5" cellspacing="0"  style="float:left; border:1px solid black;border-color:black;border-collapse:collapse;"
|-
! colspan="3" style="background:#ffdead;border-bottom:1px solid black;" | LIABILITIES:
|-
| Currency in Circulation
| || style="text-align:right;" | 1031.30
|-
| Reverse repurchase agreements
| || style="text-align:right;" | 68.09
|-
| Deposits
|  || style="text-align:right;" | 91.12
|-
| &nbsp;&nbsp;&nbsp;Term Deposits
| || style="text-align:right;" | 0
|-
| &nbsp;&nbsp;&nbsp;U.S. Treasury, general account
| || style="text-align:right;" | 76.56
|-
| &nbsp;&nbsp;&nbsp;U.S. Treasury, supplementary financing account
| || style="text-align:right;" | 5
|-
| &nbsp;&nbsp;&nbsp;Foreign official
| || style="text-align:right;" | 0.17
|-
| &nbsp;&nbsp;&nbsp;[[Clearing balance requirement|Service Related]]
| || style="text-align:right;" | 2.53
|-
| &nbsp;&nbsp;&nbsp;Other Deposits
| || style="text-align:right;" | 6.85
|-
| Funds from AIG, held as agent
| || style="text-align:right;" | 0
|-
| Other Liabilities
| || style="text-align:right; vertical-align:top;" | 73.06
|-
! style="text-align:left" | Total liabilities
|
! style="text-align:right;" | 1263.73
|}
| style="vertical-align:top;" |
{|  cellpadding="5" cellspacing="0"  style="float:left; border:1px solid black;border-color:black;border-collapse:collapse;"
|-
! colspan="3" style="background:#ffdead;border-bottom:1px solid black;" | CAPITAL <small>(AKA Net Equity)</small>
|-
| Capital Paid In ||  || style="text-align:right;" | 26.71
|-
| Surplus ||  || style="text-align:right;" | 25.91
|-
| Other Capital ||  || style="text-align:right;" | 4.16
|-
! style="text-align:left" | Total Capital
|
! style="text-align:right;" | 56.78
|-
! colspan="3" style="background:#ffdead;border:1px solid black;" | MEMO <small>(off-balance-sheet items)</small>
|-
| style="width:100px;" | Marketable securities held in custody for foreign official and international accounts
|
| style="text-align:right;" | 3445.42
|-
| &nbsp;&nbsp;&nbsp;U.S. Treasury Securities ||
| style="text-align:right;" | 2708
|-
| &nbsp;&nbsp;&nbsp;Federal Agency Securities ||
| style="text-align:right;" | 737.31
|-
| Securities lent to dealers ||  || style="text-align:right;" | 30.46
|-
| &nbsp;&nbsp;&nbsp;Overnight
| || style="text-align:right;" | 30.46
|-
| &nbsp;&nbsp;&nbsp;Term||  || style="text-align:right;" | 0
|-
|
 || ||
|}
|}
{{-}}
[[File:Consolidated Statement of Condition of all Federal Reserve Banks-ASSETS.gif|Components of the asset side of the Federal Reserve System balance sheet|thumb|right|Total combined assets for all 12 Federal Reserve Banks]]
[[File:Consolidated Statement of Condition of All Federal Reserve Banks-LIABILITIES.gif|Components of the liability side of the Federal Reserve System balance sheet|thumb|right|Total combined liabilities for all 12 Federal Reserve Banks]]

Analyzing the Federal Reserve's balance sheet reveals a number of facts:

* The Fed has over $11 billion in [[gold]] stock (certificates), which represents the Fed's financial interest in the statutory-determined value of gold turned over to the U.S. Treasury in accordance with the [[Gold Reserve Act]] on January 30, 1934.<ref name="The Federal Reserve Does NOT Own Any Gold at All">{{cite web|url=http://goldnews.com/2011/06/02/fed-lawyer-alvarez-the-federal-reserve-does-not-own-any-gold-at-all/ |publisher=Gold News|title=The Federal Reserve Does Not Own Any Gold at All |date=June 2, 2011|accessdate=August 29, 2011}}</ref>  The value reported here is based on a statutory valuation of $42 2/9 per fine troy ounce.  As of March 2009, the market value of that gold is around $247.8 billion.
* The Fed holds more than $1.8 billion in coinage, not as a [[legal liability|liability]] but as an [[asset]].  The Treasury Department is actually in charge of creating [[coin]]s and [[United States Note|U.S. Notes]].  The Fed then buys coinage from the Treasury by increasing the [[legal liability|liability]] assigned to the Treasury's account.
* The Fed holds at least $534 billion of the [[United States public debt|national debt]].  The "securities held outright" value used to directly represent the Fed's share of the national debt, but after the creation of new facilities in the winter of 2007–2008, this number has been reduced and the difference is shown with values from some of the new facilities.
* The Fed has no assets from [[repurchase agreement|overnight repurchase agreements]]. [[Repurchase agreements]] are the primary asset of choice for the Fed in dealing in the [[open market operations|open market]].  Repo assets are bought by creating depository institution liabilities and directed to the [[bank]] the [[primary dealers|primary dealer]] uses when they sell into the open market.
* The more than $1 trillion in Federal Reserve Note liabilities represents nearly the total value of all dollar bills in existence; over $176 billion is held by the Fed (not in circulation); and the "net" figure of $863 billion represents the total face value of Federal Reserve Notes in circulation.
* The $916 billion in deposit liabilities of depository institutions shows that dollar bills are not the only source of government money.  Banks can swap deposit liabilities of the Fed for Federal Reserve Notes back and forth as needed to match demand from customers, and the Fed can have the [[Bureau of Engraving and Printing]] create the paper bills as needed to match demand from banks for paper money. The amount of money printed has no relation to the growth of the monetary base (M0).
* The $93.5 billion in Treasury liabilities shows that the Treasury Department does not use private banks but rather uses the Fed directly (the lone exception to this rule is [[Treasury Tax and Loan]] because the government worries that pulling too much money out of the private banking system during tax time could be disruptive).{{Citation needed|date=May 2008}}
* The $1.6 billion foreign liability represents the amount of foreign central bank deposits with the Federal Reserve.
* The $9.7 billion in 'other liabilities and accrued dividends' represents partly the amount of money owed so far in the year to member banks for the 6% dividend on the 3% of their net capital they are required to contribute in exchange for nonvoting stock their regional Reserve Bank in order to become a member.  Member banks are also subscribed for an additional 3% of their net capital, which can be called at the Federal Reserve's discretion.  All nationally chartered banks must be members of a Federal Reserve Bank, and state-chartered banks have the choice to become members or not.
* Total capital represents the profit the Fed has earned, which comes mostly from assets they purchase with the deposit and note liabilities they create.  Excess capital is then turned over to the Treasury Department and Congress to be included into the Federal Budget as "Miscellaneous Revenue".

In addition, the balance sheet also indicates which assets are held as collateral against [[Federal Reserve Notes]].
{| cellpadding="5" cellspacing="0" style="border:1px solid black;border-color:black;border-collapse:collapse;"
! colspan="3" style="background:#ffdead; border-bottom:1px solid black;"|Federal Reserve Notes and Collateral
|-
| Federal Reserve Notes Outstanding || || style="text-align:right;"|1128.63
|-
| &nbsp;&nbsp;&nbsp;Less: Notes held by F.R. Banks || || style="text-align:right;"|200.90
|-
| &nbsp;&nbsp;&nbsp;Federal Reserve notes to be collateralized || || style="text-align:right;"|927.73
|-
| Collateral held against Federal Reserve notes || || style="text-align:right;"|927.73
|-
| &nbsp;&nbsp;&nbsp;Gold certificate account || || style="text-align:right;"|11.04
|-
| &nbsp;&nbsp;&nbsp;Special drawing rights certificate account || || style="text-align:right;"|5.20
|-
| &nbsp;&nbsp;&nbsp;U.S. Treasury, agency debt, and mortgage-backed securities pledged || || style="text-align:right;"|911.50
|-
| &nbsp;&nbsp;&nbsp;Other assets pledged || || style="text-align:right;"|0
|}

==Criticisms==
{{Main|Criticism of the Federal Reserve}}
The Federal Reserve System has faced various criticisms since its inception in 1913. These criticisms include the assertions that the Federal Reserve System violates the [[United States Constitution]] and that it impedes economic prosperity.

==See also==
{{Div col|3}}
*[[Consumer Leverage Ratio]]
*[[Core inflation]]
*[[List of economic reports by U.S. government agencies]]
*[[Fed model]]
*[[Federal Reserve Police]]
*[[Federal Reserve Statistical Release]]
*[[Free banking]]
*[[Gold standard]]
*[[Government debt]]
*[[Greenspan put]]
*[[History of Federal Open Market Committee actions]]
*[[Independent Treasury]]
*[[Legal Tender Cases]]
*[[United States Bullion Depository]] - known as Fort Knox
{{div col end}}

==References==
{{Reflist|30em}}

==Bibliography==

===Recent===
* {{cite book|url=http://www.federalreserve.gov/pf/pf.htm|title=The Federal Reserve System: Purposes and Functions|publisher=Board of Governors of the Federal Reserve System|year=2005|ref={{harvid|BoG|2005}}}}
* {{cite book|url=http://www.stlouisfed.org/inplainenglish/default.html|title=The Federal Reserve in Plain English|publisher=Board of Governors of the Federal Reserve System|year=2006|ref={{harvid|BoG|2006}}}} from the St. Louis Fed
* Epstein, Lita & Martin, Preston (2003). ''The Complete Idiot's Guide to the Federal Reserve''. Alpha Books. ISBN 0-02-864323-2.
* [[William Greider|Greider, William]] (1987). ''Secrets of the Temple''. Simon & Schuster. ISBN 0-671-67556-7; nontechnical book explaining the structures, functions, and history of the Federal Reserve, focusing specifically on the tenure of [[Paul Volcker]]
* R. W. Hafer. ''The Federal Reserve System: An Encyclopedia''. Greenwood Press, 2005. 451 pp, 280 entries; ISBN 0-313-32839-0.
* Meltzer, Allan H. ''A History of the Federal Reserve, Volume 1: 1913–1951'' (2004) ISBN 978-0-226-51999-9 (cloth) and ISBN 978-0-226-52000-1 (paper)
* Meltzer, Allan H. ''A History of the Federal Reserve, Volume 2: Book 1, 1951–1969'' (2009) ISBN 978-0-226-52001-8
* Meltzer, Allan H. ''A History of the Federal Reserve, Volume 2: Book 2, 1969–1985'' (2009) ISBN 978-0-226-51994-4; In three volumes published so far, Meltzer covers the first 70 years of the Fed in considerable detail
* [[Laurence Meyer|Meyer, Laurence H.]] (2004). ''A Term at the Fed: An Insider's View''. [[HarperBusiness]]. ISBN 0-06-054270-5; focuses on the period from 1996 to 2002, emphasizing [[Alan Greenspan|Alan Greenspan's]] chairmanship during the [[Asian financial crisis]], the [[Dot-com bubble|stock market boom]] and the [[September 11, 2001 attacks#Economic aftermath|financial aftermath]] of the September 11, 2001 attacks.
* Woodward, Bob. ''Maestro: Greenspan's Fed and the American Boom'' (2000) study of Greenspan in 1990s.

===Historical===
* J. Lawrence Broz; ''The International Origins of the Federal Reserve System''  Cornell University Press. 1997.
* Vincent P. Carosso, "The Wall Street Trust from Pujo through Medina", ''Business History Review'' (1973) 47:421-37
* Chandler, Lester V. ''American Monetary Policy, 1928–41.'' (1971).
* Epstein, Gerald and Thomas Ferguson. "Monetary Policy, Loan Liquidation and Industrial Conflict: Federal Reserve System Open Market Operations in 1932". ''Journal of Economic History'' '''44''' (December 1984): 957–84.  in JSTOR
* Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (1963)
* [[G. Edward Griffin]], ''The Creature from Jekyll Island: A Second Look at the Federal Reserve'' (1994) ISBN 0-912986-21-2
* {{cite book |title=History of Banking Institutions of Europe and the United States |last=Goddard |first=Thomas H. |publisher=Carvill |year=1831 |pages=48ff}}
* Paul J. Kubik, "Federal Reserve Policy during the Great Depression: The Impact of Interwar Attitudes regarding Consumption and Consumer Credit". ''Journal of Economic Issues''. Volume: 30. Issue: 3. Publication Year: 1996. pp 829+.
* Link, Arthur. ''Wilson: The New Freedom'' (1956) pp 199–240.
* Livingston, James. ''Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890–1913'' (1986), Marxist approach to 1913 policy
* {{cite journal |title=Secrets of Money and the Federal Reserve System |last=Marrs |first=Jim |journal=Rule by Secrecy |publisher=HarperCollins |year=2000 |pages=64–78 |ref=harv}}
* Mayhew, Anne. "Ideology and the Great Depression: Monetary History Rewritten". ''Journal of Economic Issues'' '''17''' (June 1983): 353–60.
* Mullins, Eustace C. "Secrets of the Federal Reserve", 1952. John McLaughlin. ISBN 0-9656492-1-0
* Roberts, Priscilla.  "'Quis Custodiet Ipsos Custodes?' The Federal Reserve System's Founding Fathers and Allied Finances in the First World War", ''Business History Review'' (1998) 72: 585–603
* Bernard Shull, "The Fourth Branch: The Federal Reserve's Unlikely Rise to Power and Influence" (2005) ISBN 1-56720-624-7
* Steindl, Frank G. ''Monetary Interpretations of the Great Depression.'' (1995).
* Temin, Peter. ''Did Monetary Forces Cause the Great Depression?'' (1976).
* Wells, Donald R. ''The Federal Reserve System: A History'' (2004)
* West, Robert Craig. ''Banking Reform and the Federal Reserve, 1863–1923'' (1977)
* Wicker, Elmus. "A Reconsideration of Federal Reserve Policy during the 1920–1921 Depression", ''Journal of Economic History'' (1966) 26: 223–238, in JSTOR
* Wicker, Elmus. ''Federal Reserve Monetary Policy, 1917–33.'' (1966).
* Wicker, Elmus. ''The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed'' Ohio State University Press, 2005.
* Wood, John H. ''A History of Central Banking in Great Britain and the United States'' (2005)
* Wueschner; Silvano A. ''Charting Twentieth-Century Monetary Policy: Herbert Hoover and Benjamin Strong, 1917–1927'' Greenwood Press. (1999)

==External links==
{{external links|date=March 2012}}
{{Commons category|Federal Reserve}}
{{Wikiquote|Federal Reserve System}}
{{EB1922 Poster|Federal Reserve Banking System}}

===Official Federal Reserve websites and information===
*[http://www.federalreserve.gov/boarddocs/rptcongress/default.htm#arprev Federal Reserve Reports to Congress]
*[http://www.stlouisfed.org/inplainenglish/default.html The Federal Reserve in Plain English—An easy-to-read guide to the structure and functions of the Federal Reserve System]
*[http://www.federalreserve.gov/pf/pf.htm  ebook:  The Federal Reserve System—Purposes and Functions]
*[http://www.frbsf.org/education/activities/drecon/askecon.cfm Ask Dr. Econ – An educational resource from the Federal Reserve Bank of San Francisco]
*[http://www.federalreserve.gov Board of Governors of the Federal Reserve] — Official website
*[http://www.frbsf.org/publications/federalreserve/fedinbrief/index.html "The Federal Reserve System in Brief"] — at the Federal Reserve Bank of San Francisco
*[http://www.frbsf.org/what-is-the-fed/?utm_source=home "What is the Fed?"] — at the Federal Reserve Bank of San Francisco.
*[http://fraser.stlouisfed.org/historicaldoc-document/?id=1197 Decision of the Reserve Bank Organization Committee Determining the Federal Reserve Districts and the Location of Federal Reserve Banks under the Federal Reserve Act Approved December 23, 1913, April 2, 1914; With Statement of the Committee in Relation Thereto, April 10, 1914.] 27 pages. Government Printing Office, Washington, D.C., 1914.
*[http://fraser.stlouisfed.org/frhistory/?cid=1491 Federal Reserve District Divisions and Location of Federal Reserve Banks and Head Offices, Hearings before the Reserve Bank Organization Committee] United States. Reserve Bank Organization Committee, 1914.
*[http://www.bos.frb.org/about/pubs/begin.pdf Historical Beginnings ... The Federal Reserve] by the Federal Reserve Bank of Boston
*[http://www.federalreserve.gov/otherfrb.htm Federal Reserve Districts and Banks]
*[http://www.federalreserveeducation.org/FRED/?CFID=3437521&CFTOKEN=63725306 Federal Reserve Education]
*[http://frbservices.org/ Federal Reserve Financial Services]
*[http://www.federalreserve.gov/newsevents/lectures/about.htm The Federal Reserve and the Financial Crisis] Chairman Bernanke's College Lecture Series to an undergraduate class at [[The George Washington University School of Business]] March, 2012
**[http://www.federalreserve.gov/newsevents/files/lecture-series-related-readings-20120320.pdf Related readings]
**[http://www.federalreserve.gov/newsevents/lectures/origins-and-mission.htm "Origins and Mission of the Federal Reserve" includes small fast video]
***[http://www.ustream.tv/recorded/21242022 "Chairman Ben Bernanke Lecture Series Part 1"includes large slow video] Recorded live on March 20, 2012 10:35am MST
***[http://www.federalreserve.gov/newsevents/files/bernanke-lecture-one-20120320.pdf Lecture materials]
**[http://www.federalreserve.gov/newsevents/lectures/the-Federal-Reserve-after-World-War-II.htm "The Federal Reserve after World War II" includes small fast video]
***[http://www.ustream.tv/recorded/21283966 "Chairman Ben Bernanke Lecture Series Part 2" includes large slow video] Recorded live on March 22, 2012 10:37am MST
***[http://www.federalreserve.gov/newsevents/files/bernanke-lecture-two-20120322.pdf Lecture materials]
**[http://www.federalreserve.gov/newsevents/lectures/federal-reserve-response-to-the-financial-crisis.htm "The Federal Reserve's Response to the Financial Crisis" includes small fast video]
***[http://www.ustream.tv/recorded/21404362 "Chairman Ben Bernanke Lecture Series Part 3" includes large slow video] Recorded live on March 27, 2012 10:38am MST
***[http://www.federalreserve.gov/newsevents/files/bernanke-lecture-three-20120327.pdf Lecture materials]
**[http://www.federalreserve.gov/newsevents/lectures/the-aftermath-of-the-crisis.htm "The Aftermath of the Crisis" includes small fast video]
***[http://www.federalreserve.gov/newsevents/files/bernanke-lecture-four-20120329.pdf Lecture materials]
*[http://www.federalreserve.gov/bios/boardmembership.htm Board membership]

====Historical Resources====
*[http://fraser.stlouisfed.org/topics/?tid=25 FRASER] (Federal Reserve Archival System for Economic Research)

====Open Market operations====
*[http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html NY FED: Open Market Operations]

====Repurchase agreements====
*[http://www.newyorkfed.org/aboutthefed/fedpoint/fed04.html NY FED: Repurchase and Reverse Repurchase Transactions]

====Discount window====
*[http://www.frbdiscountwindow.org/index.cfm/ The Official FED Discount Window information website]

====Economic indicators====
*[http://www.federalreserveeducation.org/fed101_html/policy/indicators_print.htm Consumer Price Index Calculator]

====Federal Reserve publications====
*[[Media:Modern Money Mechanics.pdf|Modern Money Mechanics]] (out of print)
*[http://www.newyorkfed.org/publications/result.cfm?comics=1 Publications Catalog]
*[http://www.federalreserve.gov/fomc/fundsrate.htm Federal Funds Rate Changes] (Base Deposit Rate)

===Other websites describing the Federal Reserve===
*[http://money.howstuffworks.com/fed.htm "How 'The Fed' Works"], HowStuffWorks.com
*[http://www.money-rates.com/fed.htm "Federal Reserve Update"], money-rates.com
*[http://demonstrations.wolfram.com/MacroeconomicEffectsOfInterestRateCuts/ Macroeconomic Effects of Interest Rate Cuts], by Jason Cawley, [[Wolfram Demonstrations Project]], 2007
*[http://www.glotter.com/entry-1844 All 12 Federal Reserve Banks on a Google Map]

===Sites critical of the Federal Reserve===
* [[Ludwig von Mises Institute]]
* [http://mises.org/story/2870 Money, Banking, and the Federal Reserve]
* [http://fee.org/articles/tgif/bankers-bank/ Foundation for Economic Education]
* [http://www.auditthefed.com/ Audit The Fed]
{{Federal Reserve System}}
{{Central banks}}
{{US currency and coinage}}
{{Bank regulation in the United States}}
{{United States topics}}

[[Category:Federal Reserve| ]]
[[Category:Banks established in 1913]]
[[Category:Central banks|United States]]
[[Category:Financial regulatory authorities of the United States]]
[[Category:Government agencies established in 1913]]
[[Category:1913 establishments in the United States]]

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[[id:Federal Reserve System]]
[[it:Federal Reserve System]]
[[he:הבנק הפדרלי]]
[[ka:ფედერალური სარეზერვო სისტემა]]
[[la:Systema aerarium foederale]]
[[lt:Federalinė rezervų sistema]]
[[hu:Federal Reserve System]]
[[mk:Федерални резерви на САД]]
[[mr:फेडरल रिझर्व सिस्टम]]
[[nl:Federal Reserve]]
[[ja:連邦準備制度]]
[[no:Federal Reserve]]
[[nn:Federal Reserve System]]
[[pl:System Rezerwy Federalnej Stanów Zjednoczonych]]
[[pt:Sistema de Reserva Federal dos Estados Unidos]]
[[ro:Sistemul Federal de Rezerve al Statelor Unite ale Americii]]
[[ru:Федеральная резервная система]]
[[simple:Federal Reserve]]
[[sk:Federal Reserve System]]
[[sr:Савезне резерве Сједињених Америчких Држава]]
[[fi:Federal Reserve System]]
[[sv:Federal Reserve System]]
[[tl:Federal Reserve System]]
[[tr:Federal Reserv Sistemi]]
[[uk:Федеральна резервна система]]
[[ur:فیڈرل ریزرو]]
[[vi:Cục Dự trữ Liên bang (Hoa Kỳ)]]
[[yi:פעדעראלע רעזערוו]]
[[zh:聯邦準備系統]]