The Federal Reserve is headed by Board of Governors located in Washington D.C. The board comprises of seven governors who are appointed by the government and approved by the Senate (Wells). To maintain effectiveness over a long time, the governors serve for 14 years term. The board consists of a chairman and vice chairman appointed for four-year terms. The objectives of the board are to offer monetary policy guidance, analyze both domestic and international economics as well as foresee committees that study current issues such as laws related to consumer banking and electronic commerce.
The board controls the industry offering services, exercises regulations for consumer protection as well as managing the payments system of the nation. The board supervises the activities of Reserve bank and approves appointments of presidents as well as the members of the board (Wells). The board of governors is tasked with setting both depository and discount rates requirements for the financial institutions. The main task of the board is to contribute to the Federal Open Market Committee (FOMC) whose responsibility is to carry out the monetary policy of the nation. The members contribute significantly in the voting of FOMC, and the rest of the votes are from the presidents of Reserve Bank. The members testify to the Congress, and the chairman is expected to report to the Congress twice per year. The purpose of appearing to the Congress is to update them on the monetary policy objectives.
The second level of leadership is the Federal Reserve Banks which consists of 12 Federal Reserve Banks and 24 branches (Wells). Each of the 12 banks serves the region in which they are located, and nine of them have other offices to facilitate depository services to the financial institutions in the Districts. They serve the banks, the nation’s treasury, and the public. The reserve bank is the bank for other banks, and it stores the nation’s currency and also processes both the checks and electronic payments. They also handle the payments for the treasury and sell securities for the government.
The leadership structure also consists of member banks whereby approximately 38 percent of the total commercial banks are members. Approximately 17,000 depository financial institutions are also incorporated in the Federal Reserve System (Wells). The Federal Open Market Committee is also part of the Federal Reserve System leadership, and it is tasked with the formulation of policy that helps in maintaining price stability as well as economic growth. The Advisory Councils are part of the reserve system, and there are three namely the Consumer Advisory Council, the Federal Advisory Council as well as the Thrift Institutions Advisory Council. The figure below shows the Federal Reserve System is structured.
Monetary Supply Tools
One of the tools utilized by the Federal Reserve to operate the monetary supply is the open market operations with the New York District Bank bearing the responsibility of selling the securities for the government to the public (;D’arista). When the federal wants to increase the reserves, it directs the NY Bank to buy the securities and when the need arises to decrease the reserves the bank is instructed to sell the securities. The buying and selling of government securities helps in regulating the federal funds rate.
The second tool used to operate the monetary supply is the discount rate which is changed to commercial banks for short loans (D’arista). When the Federal Reserve’s loans funds to a commercial bank at a discount it can adjust the supply of money. If an increase in supply is required, they react by decreasing the rate of discount. This move motivates the banks to obtain money from the Reserve rather than from themselves. On the contrary, if they require to reduce the supply of money the discount rates are hiked to discourage the banks from borrowing from the reserve but instead borrow from one another.
There exists a relationship between the Federal Reserve and the Central banks since it offers financial and banking services to approximately 250 banks as well as governments and international institutions. The assets that are held in the foreign accounts are in U.S currency as well as the securities. Foreign account holders embrace the payment and receiving system used by the Federal Reserve. Also, the accounts contain foreign monetary gold.
The 2008 Financial Recession
After the great depression that occurred in 1929, the 2008 financial crisis has been documented as the terrible economic disaster of the time (Grusky). Both the Treasury Department and the Federal Reserve had tried as much as they could to prevent the disaster. During this hard economic time, the prices of the house decreased by 31.8 percent which was more than that witnessed during the great depression. The recession ended after two years, but the impact was greatly felt since the employment rate was above 9 percent and the workers were discouraged.
The housing prices started decreasing in 2006, but the realtors were not much worried as they thought this was not going to last long. This was however not the case because the own owners had loans of up to more than 100 percent the value of the property (Grusky). Financial institutions ad Hedge funds had a lot of debt for backed securities. The stodgy pension funds decided on buying the risky assets because they thought that the insurance called credit default swaps was protecting them. The crisis first sign was witnessed in 2007 when banks realized that they had incurred a lot of losses so they stopped loaning and they no longer accepted mortgages as collateral. In 2008 investors sold the shares they owned in Bear Stearns because the bank had too many risky assets. Despite the funds given to the institution by the Federal Reserve, it was always not enough.
Wells, Donald R. The Federal Reserve System: A History. McFarland, 2017.
Grusky, David B., Bruce Western, and Christopher Wimer, Eds. The great recession. Russell Sage Foundation, 2011.
D’arista, Jane W. The Evolution of US Finance: v. 1: Federal Reserve Monetary Policy, 1915-35. Routledge, 2016.