Conducting Monetary Policy

One of the most important jobs of the Federal Reserve is to maintain price stability and sustainable economic growth. It does this through its role in monetary policy. Specifically, the Fed influences the nation's supply of money and credit.

The FOMC establishes the goals of monetary policy. To achieve this success, the Fed uses a variety of intermediate targets, including monetary aggregates, reserve aggregates and interest rates, to gauge the impact of its policies on the nation's economy. But the 12 Reserve Banks play critical roles, too. After each meeting, the FOMC issues a directive to the Open Market Desk at the New York Fed. This directive sets out some general objectives that the FOMC wishes the Open Market Desk to achieve—easing, tightening or maintaining the growth of the nation's money supply. To achieve these goals, the Open Market Desk each day buys or sells Treasury securities in the open market. While policy deliberations of the FOMC are conducted in private, the Fed has always made its decisions known to the public. Beginning in 1994, the FOMC began announcing its policy decisions immediately after making them.

Research economists at all 12 Reserve Banks, as well as economists at the Board of Governors, contribute to the policymaking process. Generally speaking, Reserve Banks are monitoring the unique economies of their districts and studying relationships among national economic indicators. Their primary duty is to prepare their Reserve Bank president for his or her participation in FOMC deliberations. They also collect loan and deposit data from banks and bank holding companies used in analyzing regional and national bank performance, credit demand and other banking topics.

Supervising Banks

When creating the Federal Reserve, one of Congress’ paramount concerns was to address the nation's banking panics. This short-term need led to one of the Fed’s three main responsibilities: to foster safe, sound and competitive practices in the nation's banking system.

To accomplish this, Congress gave the Fed responsibility to regulate the banking system and supervise certain types of financial institutions. What's the difference between these two? Bank regulation refers to the written rules that define what acceptable behavior is for financial institutions. The Board of Governors carries out this responsibility. Bank supervision refers to the enforcement of these rules. The 12 Reserve Banks carry out this responsibility, supervising state-chartered member banks, the companies that own banks (bank holding companies) and international organizations that do banking business in the United States. For the Fed, supervising banks generally means one of three duties: establishing safe and sound banking practices; protecting consumers in financial transactions; and ensuring the stability of U.S. financial markets by acting as lender of last resort. The common goal of all three duties, however, is the same: to minimize risk in the banking system.

Another Fed goal is to protect consumers in lending and deposit transactions. Congress has given the Fed broad power to make, interpret and enforce laws that protect consumers from lending discrimination and inaccurate disclosure of credit costs or interest rates.

Perhaps the most important supervisory responsibility of all, however, is to respond to a financial crisis by acting as lender of last resort for the nation's banking system. Through its "discount window," the Fed lends money to banks so that a shortage of funds at one institution does not disrupt the flow of money and credit in the entire banking system. Typically, the Fed makes loans to satisfy a bank's unanticipated needs for short-term funds. But the Fed also makes longer-term loans to help banks manage seasonal fluctuations in their customers' deposit or credit demands.

Providing Financial Services

The Federal Reserve is charged with the critical task of providing a safe and efficient method of transferring funds throughout the banking system. Reserve Banks and their branches carry out this mission, offering payments services to all financial institutions in the United States, regardless of size or location. Hand in hand with that mission is the obligation to improve the payments system by encouraging efficiency and technological advances.

Essentially, a Reserve Bank serves as a bankers’ bank, offering a wide variety of payments services. It distributes currency and coin, processes checks and offers electronic forms of payment. The Fed competes with the private sector in its financial services to foster competition in the marketplace, and promote innovation and efficiency in the payments system. It does not seek to make a profit from its participation; it sets prices only to recover costs.

Regional Reserve Banks are responsible for meeting public demand for currency and coin within their districts. In addition, Reserve Banks also process commercial checks. Every day billions of dollars are transferred electronically among U.S. financial institutions. The Reserve Banks provide two electronic payment services: funds transfer and the automated clearing house, or ACH. The funds transfer service provides a communications link among financial institutions and government agencies. The ACH provides a nationwide network to exchange paperless payments among financial institutions and government agencies. The ACH accommodates a wide range of recurring corporate and consumer transactions, such as payroll deposit, electronic bill payment, insurance payments and Social Security disbursements.

In addition to serving as the bankers’ bank, the Federal Reserve System acts as banker for the U.S. government. Federal Reserve Banks maintain accounts for the U.S. Treasury, process government checks, postal money orders and U.S. savings bonds, and collect federal tax deposits. Reserve Banks also sell new Treasury securities, service outstanding issues and redeem maturing issues.