Module 8

Federal Reserve

Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply
the Fed) is the central banking system of the United States of America. It was
created on December 23, 1913, with the enactment of the Federal Reserve Act, after
a series of financial panics (particularly the panic of 1907) led to the desire for central
control of the monetary system in order to alleviate financial crises. Over the years,
events such as the Great Depression in the 1930s and the Great Recession during the
2000s have led to the expansion of the roles and responsibilities of the Federal
Reserve System.

Congress established three key objectives for monetary policy in the Federal Reserve
Act: maximizing employment, stabilizing prices, and moderating long-term interest
rates. The first two objectives are sometimes referred to as the Federal Reserve's
dual mandate. Its duties have expanded over the years, and currently also include
supervising and regulating banks, maintaining the stability of the financial system,
and providing financial services to depository institutions, the U.S. government, and
foreign official institutions. The Fed also conducts research into the economy and
provides numerous publications, such as the Beige Book and the FRED database.
The Federal Reserve System is composed of several layers. It is governed by the
presidentially-appointed board of governors or Federal Reserve Board (FRB).
Twelve regional Federal Reserve Banks, located in cities throughout the nation,
regulate and oversee privately-owned commercial banks. Nationally chartered
commercial banks are required to hold stock in, and can elect some board members
of, the Federal Reserve Bank of their region.

The Federal Reserve System is the central bank of the United States. It performs five
general functions to promote the effective operation of the U.S. economy and, more
generally, the public interest. The Federal Reserve
• conducts the nation’s monetary policy to promote maximum employment,
stable prices, and moderate long-term interest rates in the U.S. economy;
• promotes the stability of the financial system and seeks to minimize and
contain systemic risks through active monitoring and engagement in the U.S.
and abroad;
• promotes the safety and soundness of individual financial institutions and
monitors their impact on the financial system as a whole;
• fosters payment and settlement system safety and efficiency through services
to the banking industry and the U.S. government that facilitate U.S.-dollar
transactions and payments; and
• promotes consumer protection and community development through
consumer-focused supervision and examination, research and analysis of
emerging consumer issues and trends, community economic development
activities, and the administration of consumer laws and regulations.
Board Members

What Does the Federal Reserve Board of Governors Do?

Governors actively lead committees that study prevailing economic issues—from
affordable housing and consumer banking laws to interstate banking and electronic
commerce. The Board of Governors also exercises broad supervisory control over
certain state-chartered financial institutions, called member banks, as well as the
companies that own banks (bank holding companies). This control ensures that
commercial banks operate responsibly and comply with federal regulations and that
the nation's payments system functions smoothly.
In addition, the Board of Governors oversees the activities of Reserve Banks,
approving the appointments of each Reserve Bank's president and three members of
its board of directors. The Governors' most important responsibility is participating
on the FOMC, the committee that directs the nation's monetary policy.
Current Board Members
The seven members of the Board of Governors of the Federal Reserve System are
nominated by the President and confirmed by the Senate. A full term is fourteen
years. One term begins every two years, on February 1 of even-numbered years. A
member who serves a full term may not be reappointed. A member who completes
an unexpired portion of a term may be reappointed. All terms end on their statutory
date regardless of the date on which the member is sworn into office.

The Chair and the Vice Chair of the Board, as well as the Vice Chair for Supervision,
are nominated by the President from among the members and are confirmed by the
Senate. They serve a term of four years. A member's term on the Board is not
affected by his or her status as Chair or Vice Chair

Federal Open Market Committee (FOMC)

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. The Federal Reserve Act of 1913 gave the
Federal Reserve responsibility for setting monetary policy.

The Federal Reserve controls the three tools of monetary policy--open market
operations, the discount rate, and reserve requirements. The Board of Governors of
the Federal Reserve System is responsible for the discount rate and reserve
requirements, and the Federal Open Market Committee is responsible for open
market operations. Using the three tools, the Federal Reserve influences the demand
for, and supply of, balances that depository institutions hold at Federal Reserve
Banks and in this way alters the federal funds rate. The federal funds rate is the
interest rate at which depository institutions lend balances at the Federal Reserve to
other depository institutions overnight.

Changes in the federal funds rate trigger a chain of events that affect other short-
term interest rates, foreign exchange rates, long-term interest rates, the amount of
money and credit, and, ultimately, a range of economic variables, including
employment, output, and prices of goods and services.

Structure of the FOMC

The Federal Open Market Committee (FOMC) consists of twelve members--the

seven members of the Board of Governors of the Federal Reserve System; the
president of the Federal Reserve Bank of New York; and four of the remaining
eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The
rotating seats are filled from the following four groups of Banks, one Bank president
from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago;
Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco.
Nonvoting Reserve Bank presidents attend the meetings of the Committee,
participate in the discussions, and contribute to the Committee's assessment of the
economy and policy options.

The FOMC holds eight regularly scheduled meetings per year. At these meetings,
the Committee reviews economic and financial conditions, determines the
appropriate stance of monetary policy, and assesses the risks to its long-run goals of
price stability and sustainable economic growth.

2022 Committee Members

• Jerome H. Powell, Board of Governors, Chair
• John C. Williams, New York, Vice Chair
• Michael S. Barr, Board of Governors
• Michelle W. Bowman, Board of Governors
• Lael Brainard, Board of Governors
• James Bullard, St. Louis
• Susan M. Collins, Boston
• Lisa D. Cook, Board of Governors
• Esther L. George, Kansas City
• Philip N. Jefferson, Board of Governors
• Loretta J. Mester, Cleveland
• Christopher J. Waller, Board of Governors
Alternate Members
• Charles L. Evans, Chicago
• Patrick Harker, Philadelphia
• Neel Kashkari, Minneapolis
• Lorie K. Logan, Dallas
• Helen E. Mucciolo, Interim First Vice President, New York
Federal Reserve Bank Rotation on the FOMC
Committee membership changes at the first regularly scheduled meeting of the year.
2023 2024 2025

Members New York New York New York

Chicago Cleveland Chicago
Philadelphia Richmond Boston
Dallas Atlanta St. Louis
Minneapolis San Francisco Kansas City

Alternate New York New York New York

Members Cleveland Chicago Cleveland
Richmond Boston Philadelphia
Atlanta St. Louis Dallas
San Francisco Kansas City Minneapolis
FOMC Meetings

The FOMC holds eight regularly scheduled meetings during the year and other
meetings as needed. The minutes of regularly scheduled meetings are released
three weeks after the date of the policy decision. Committee membership changes
at the first regularly scheduled meeting of the year.
Fed’s Mandate

Federal Reserve has operated under a mandate from Congress to "promote

effectively the goals of maximum employment and stable prices "
Fed’s Monetary Policy: What Are Its Goals? How Does It Work?

What are the goals of monetary policy?

The Federal Reserve Act mandates that the Federal Reserve conduct monetary
policy "so as to promote effectively the goals of maximum employment, stable
prices, and moderate long-term interest rates." Even though the act lists three distinct
goals of monetary policy, the Fed's mandate for monetary policy is commonly
known as the dual mandate. The reason is that an economy in which people who
want to work either have a job or are likely to find one fairly quickly and in which
the price level (meaning a broad measure of the price of goods and services
purchased by consumers) is stable creates the conditions needed for interest rates to
settle at moderate levels.

Decisions about monetary policy are made at meetings of the Federal Open Market
Committee (FOMC). The FOMC comprises the members of the Board of Governors;
the president of the Federal Reserve Bank of New York; and 4 of the remaining 11
Reserve Bank presidents, who serve one-year terms on a rotating basis. All 12 of the
Reserve Bank presidents attend FOMC meetings and participate in FOMC
discussions, but only the presidents who are Committee members at the time may
vote on policy decisions.

Each year, the FOMC explains in a public statement how it interprets its monetary
policy goals and the principles that guide its strategy for achieving them. The FOMC
judges that low and stable inflation at the rate of 2 percent per year, as measured
by the annual change in the price index for personal consumption expenditures, is
most consistent with achievement of both parts of the dual mandate. To assess the
maximum-employment level that can be sustained, the FOMC considers a broad
range of labor market indicators, including how many workers are unemployed,
underemployed, or discouraged and have stopped looking for a job.

The Fed also looks at how hard or easy it is for people to find jobs and for employers
to find qualified workers. The FOMC does not specify a fixed goal for employment
because the maximum level of employment is largely determined by nonmonetary
factors that affect the structure and dynamics of the labor market; these factors may
change over time and may not be directly measurable. However, Fed policymakers
release their estimates of the unemployment rate that they expect will prevail once
the economy has recovered from past shocks and if it is not hit by new shocks.
How does monetary policy work?

Figure 1 provides an illustration of the transmission of monetary policy. In the

broadest terms, monetary policy works by spurring or restraining growth of
overall demand for goods and services in the economy. When overall demand
slows relative to the economy's capacity to produce goods and services,
unemployment tends to rise and inflation tends to decline. The FOMC can help
stabilize the economy in the face of these developments by stimulating overall
demand through an easing of monetary policy that lowers interest rates. Conversely,
when overall demand for goods and services is too strong, unemployment can fall to
unsustainably low levels and inflation can rise. In such a situation, the Fed can guide
economic activity back to more sustainable levels and keep inflation in check by
tightening monetary policy to raise interest rates. The process by which the FOMC
eases and tightens monetary policy to achieve its goals is summarized as follows.

Policy tools with Fed

The Federal Reserve has a variety of policy tools that it uses in order to implement
monetary policy.

• Open Market Operations

• Discount Window and Discount Rate
• Reserve Requirements
• Interest on Reserve Balances
• Overnight Reverse Repurchase Agreement Facility
• Term Deposit Facility
• Central Bank Liquidity Swaps
• Foreign and International Monetary Authorities (FIMA) Repo Facility
• Standing Overnight Repurchase Agreement Facility
• Expired Policy Tools
The federal funds rate and the target range

The FOMC's primary means of adjusting the stance of monetary policy is by

changing its target for the federal funds rate. To explain how such changes affect
the economy, it is first necessary to describe the federal funds rate and explain how
it helps determine the cost of short-term credit.

On average, each day, U.S. consumers and businesses make noncash payments--
including payments through debit cards, credit cards, electronic transfers, and
checks--worth roughly $1/2 trillion. To facilitate such payments, banks hold reserve
balances at the Fed; payments can be settled by transferring reserve balances
between banks.

Banks also hold these balances to meet unexpected liquidity needs and to satisfy a
number of regulatory requirements aimed at ensuring that banks are sound and that
their customers' deposits are safe. Banks may borrow and lend reserves to each other
depending on their needs and market conditions; as such, banks can use reserve
balances both as a means of funding and as an investment.

The federal funds rate is the interest rate that banks pay to borrow reserve balances
overnight.

The FOMC has the ability to influence the federal funds rate--and thus the cost of
short-term interbank credit--by changing the rate of interest the Fed pays on reserve
balances that banks hold at the Fed. A bank is unlikely to lend to another bank (or to
any of its customers) at an interest rate lower than the rate that the bank can earn on
reserve balances held at the Fed. And because overall reserve balances are currently
abundant, if a bank wants to borrow reserve balances, it likely will be able to do so
without having to pay a rate much above the rate of interest paid by the Fed.

Typically, changes in the FOMC's target for the federal funds rate are accompanied
by commensurate changes in the rate of interest paid by the Fed on banks' reserve
balances, thus providing incentives for the federal funds rate to adjust to a level
consistent with the FOMC's target.

How changes in the federal funds rate affect the broader economy

Changes in the FOMC's target for the federal funds rate affect overall financial
conditions through several channels. For instance, federal funds rate changes are
rapidly reflected in the interest rates that banks and other lenders charge on short-
term loans to one another, households, nonfinancial businesses, and government
entities. In particular, the rates of return on commercial paper and U.S. Treasury
bills--which are short-term debt securities issued by private companies and the
federal government, respectively, to raise funds--typically move closely with the
federal funds rate. Similarly, changes in the federal funds rate are rapidly reflected
in the rates applied to floating-rate loans, including floating-rate mortgages as well
as many personal and commercial credit lines.

Longer-term interest rates are especially important for economic activity and job
creation because many key economic decisions--such as consumers' purchases of
houses, cars, and other big-ticket items or businesses' investments in structures,
machinery, and equipment--involve long planning horizons. The rates charged on
longer-term loans are related to expectations of how monetary policy and the broader
economy will evolve over the duration of the loans, not just to the current level of
the federal funds rate. For this reason, revisions to the expectations of households
and businesses regarding the likely course of short-term interest rates can affect the
level of longer-term interest rates. Fed communications about the likely course of
short-term interest rates and the associated economic outlook, as well as changes in
the FOMC's current target for the federal funds rate, can help guide those
expectations, resulting in an easing or a tightening of financial conditions.

In addition to eliciting changes in market interest rates, realized and expected

changes in the target for the federal funds rate can have repercussions for asset
prices. Changes in interest rates tend to affect stock prices by changing the relative
attractiveness of equity as an investment and as a way of holding wealth.
Fluctuations in interest rates and stock prices also have implications for household
and corporate balance sheets, which can, in turn, affect the terms on which
households and businesses can borrow.

Changes in mortgage rates affect the demand for housing and thus influence house
prices. Variations in interest rates in the United States also have a bearing on the
attractiveness of U.S. bonds and related U.S. assets compared with similar
investments in other countries; changes in the relative attractiveness of U.S. assets
will move exchange rates and affect the dollar value of corresponding foreign-
currency-denominated assets.

Changes in interest rates, stock prices, household wealth, the terms of credit, and the
foreign exchange value of the dollar will, over time, have implications for a wide
range of spending decisions made by households and businesses. For example, when
the FOMC eases monetary policy (that is, reduces its target for the federal funds
rate), the resulting lower interest rates on consumer loans elicit greater spending on
goods and services, particularly on durable goods such as electronics, appliances,
and automobiles. Lower mortgage rates make buying a house more affordable and
encourage existing homeowners to refinance their mortgages to free up some cash
for other purchases.

Lower interest rates can make holding equities more attractive, which raises stock
prices and adds to wealth. Higher wealth tends to spur more spending. Investment
projects that businesses previously believed would be marginally unprofitable
become attractive because of reduced financing costs, particularly if businesses
expect their sales to rise. And to the extent that an easing of monetary policy is
accompanied by a fall in the exchange value of the dollar, the prices of U.S. products
will fall relative to those of foreign products so that U.S. products will gain market
share at home and abroad.
Monetary policy and the 2007-09 Global Financial Crisis

The crisis in financial markets that began in the summer of 2007 and became
particularly severe in 2008 led the FOMC to cut its target for the federal funds rate
from 5-1/4 percent in mid-September 2007 to near zero in late December 2008. Even
after this large cut, the U.S. economy required substantial additional support.
However, with the federal funds rate near zero, the Fed could no longer rely on its
primary means of easing monetary policy.

One of the ways in which the FOMC provided further support to the economy was
by offering explicit forward guidance about expected future monetary policy in its
communications. The FOMC conveyed that it likely would keep a highly
accommodative stance of monetary policy until a marked improvement in the labor
market had been achieved. Short-term interest rates expected to prevail in the future
and longer-term yields on bonds fell in response to this forward guidance.

Another key monetary policy tool deployed in response to the financial crisis was
large-scale asset purchases, which were purchases in securities markets over six
years of roughly $3.7 trillion in longer-term Treasury securities as well as securities
issued by government-sponsored enterprises. By boosting the overall demand for
these securities, the Fed put additional downward pressure on longer-term interest
rates. Moreover, as the Fed purchased these securities, private investors looked for
other investment opportunities, and, in doing so, they pushed down other long-term
interest rates, such as those on corporate bonds, and pushed up asset valuations,
including equity prices. These market reactions to the large-scale asset purchases
helped ease overall financial market conditions and thus supported growth in
economic activity, job creation, and a return of inflation toward 2 percent.

In December 2015, the FOMC took a first step toward returning the stance of
monetary policy to more normal levels by increasing its target for the federal funds
rate from near zero.

A further step toward normalization occurred in October 2017, when the FOMC
began a gradual reduction in its securities holdings. The FOMC has indicated that,
going forward, adjustments in the federal funds rate will be the primary way of
changing the stance of monetary policy.
In the United States, the federal funds rate is the interest rate at which depository
institutions (banks and credit unions) lend reserve balances to other depository
institutions overnight on an uncollateralized basis. Reserve balances are amounts
held at the Federal Reserve to maintain depository institutions' reserve requirements.
Institutions with surplus balances in their accounts lend those balances to institutions
in need of larger balances. The federal funds rate is an important benchmark in
financial markets.

The effective federal funds rate (EFFR) is calculated as the effective median
interest rate of overnight federal funds transactions during the previous business day.
It is published daily by the Federal Reserve Bank of New York.

The federal funds target range is determined by a meeting of the members of the
Federal Open Market Committee (FOMC) which normally occurs eight times a year
about seven weeks apart. The committee may also hold additional meetings and
implement target rate changes outside of its normal schedule.

The Federal Reserve uses open market operations to bring the effective rate into the
target range. The target range is chosen in part to influence the money supply in the
U.S. economy.

What is discount rate?

Discount rate is the interest rate the Fed charges to commercial banks and other
depository institutions on loans from their regional Federal Reserve Bank's lending
facility, or discount window. These loans give banks and other institutions ready
access to money and support the smooth flow of credit to households and businesses.
The specific interest rate that determines bank lending rates and the cost of credit for
borrowers.

Secured Overnight Financing Rate (SOFR)

The Secured Overnight Financing Rate, or SOFR, is an influential interest rate that
banks use to price U.S. dollar-denominated derivatives and loans. The daily Secured
Overnight Financing Rate (SOFR) is based on transactions in the Treasury
repurchase market, where investors offer banks overnight loans backed by their bond
assets.

The three key interest rates in the United States are the Federal Fund rate,
Discount rate and the Secured Overnight Financing Rate.
Quarterly FOMC Meetings

Quarterly meetings are important as we get Summary of Economic Projections in

these meetings What is summary of economic projections (SEP)?

The Fed’s Summary of Economic Projections (SEP) is released four times each year
and includes FOMC participants' projections for gross domestic product (GDP)
growth, the unemployment rate, inflation, and the appropriate policy interest rate.

The summary also provides information regarding policymakers' views on the

uncertainty and risks to their outlook. The SEP offers numerical values to key
metrics for the current year and the subsequent two years as well as over the longer
run.

When the Fed wants to expand the money supply, it will typically lower one or both
key rates in order to decrease the cost of borrowing.
When the Fed is in a contractionary phase, it will raise the rates to increase the cost
of borrowing.
Timings of Rate Decision and Press Conference

The interest rate decision, is always scheduled for 2 pm ET, will be followed by Fed
Chair Jerome Powell's press conference. Fed Chairman’s media conference begins
at 2:30 p.m. ET

Timings for SOFR fixing

SOFR fixing publishes at 8 AM ET

Timings for EFFR fixing

EFFR fixing publishes at 9 AM ET

When are FOMC Minutes released?

Fed Minutes are announced after 3 weeks of the meeting

When are FOMC meetings held?

FOMC meetings are held after roughly 45 days of the last meeting. It starts on
Tuesday and end on Wednesday

What is blackout period?

FOMC Members do not speak publicly between a week prior to the Saturday
preceding a Federal Open Market Committee (FOMC) meeting and the Thursday
following that meeting. This time is referred to as the FOMC blackout period.

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