[0:04]The Federal Reserve and you. The Federal Reserve is the Central Bank of the United States. It handles trillions of dollars every day. The Federal Reserve is not a bank like the ones you're familiar with, but it does many things for us. When you buy a T-shirt for $10 or a company transfers millions of dollars, there's a good chance the Fed's involved in making sure payments go where they're supposed to go. Also, people from the Fed supervise many of the nation's banks, making sure they stay healthy and play by the rules. And the Fed helps keep the economy stable, so prices don't shoot up and the economy keeps growing. If you want to know how our country's economy works, there's no better place to start than by looking at the Federal Reserve.
[0:53]So, how should we start? Just say what the Fed is. The Federal Reserve, known as the Fed, is the central bank of the United States. And a central bank is? Well, a central bank regulates the supply of money in a country, issues currency in that country, and oversees the country's banks. Actually, the Federal Reserve is a decentralized central bank. But how can a central bank be decentralized? Because the Fed has 12 regional Reserve banks. They're spread throughout the country. As our central bank, the Fed is one of the main institutions in the U.S. that influences the economy. So, say what an economy is. An economy is the system by which goods and services are produced, sold, and bought in a country or region. In other words, we're producing and selling and buying goods like cars and apples and shampoo. And services, provided by nurses and sales clerks and car mechanics. All these things are part of the economy. And since all of us buy goods and services, the economy affects us every day. The Federal Reserve has very important effects on everyone's daily lives. First of all, in making monetary policy, we affect interest rates that everybody pays. We are involved in setting the monetary policy for the nation. That sounds abstract, right? How could that have anything to do with me? But it has a direct influence on the daily lives of people all across the country because it affects the interest rates, what you're paying for your mortgage or for your car loan. The decisions the Fed makes, um, determine the level of short-term interest rates and, um, expectations about the path of short-term interest rates affect longer-term interest rates and, uh, in turn, uh, those interest rates affect what people pay for mortgages. The level of interest rates also affect, for example, what you would pay on your credit card to borrow. So, borrowing costs are, uh, affected by the monetary policies that, uh, we set. If you take the money out of your pocket, that folding money and the quality of it is our responsibility. And we help protect its value and make sure that it's sound. So we have very broad responsibilities that affect every citizen in our country in every imaginable way. One of the Federal Reserve's biggest jobs is to help keep the economy on track. Growing as fast as it can, but keeping prices in general from rising by very much. The Fed also has a mandate to maximize employment to do what it can to create the right environment so businesses can create jobs and keep people working. So, Congress has established some important goals for us for monetary policy. And in particular, the main goals we've been charged with is maximum employment and price stability. So, we're trying to establish, uh, conditions in credit markets that will foster a strong economy, one that's able to provide jobs for people who, um, are looking, are looking for work. Um, and stable prices that will aid people in their financial planning. We know about the Fed's goals, but what does the Federal Reserve actually do? Well, the Fed operates in three major areas: payments, supervision and regulation, and monetary policy. We're going to take a look at payments, supervision and regulation and monetary policy in a few minutes, but first, let's see how the Fed is structured. What are the parts that make up the Federal Reserve System?
[4:41]We've talked about the Federal Reserve as our decentralized central bank. And you know that part of that decentralization is that the Fed has 12 regional Reserve banks spread throughout the country. But there's more to it than that. Right. The Federal Reserve is made up of three major parts. The Board of Governors, those Reserve banks we talked about, and the Federal Open Market Committee. As we take a closer look at that structure, you'll see that it's a blend of parts that are decentralized and parts that are centralized. Like the Board of Governors. The Board of Governors in Washington oversees the Federal Reserve System. There are seven members, including the chairman. Members of the Board of Governors are appointed by the President of the United States and confirmed by the Senate. They serve 14-year terms of office. Specifically, the Board of Governors oversees the Federal Reserve System.
[5:36]And is part of the process for making monetary policy, part of the process for making the regulations and and supervisory decisions that the Federal Reserve makes to try to preserve a stable financial system. Our country is vast, and different regions of the country have different economies. Because of that, each of the 12 Reserve banks is different.
[5:57]Each reflects the economy and points of view of its region. And many of these Reserve banks have branches, too. We provide services to the banks in the region. We supervise and regulate those banks. And lastly, we are deeply involved in our regions in terms of economic development and community development. That can't happen from one central point. The diversity of the 12 regional banks is the strength of the Federal Reserve System.
[6:23]Staff members stay in touch with local business people and other folks in their communities, and they listen to their concerns. Each Reserve Bank has a nine-member Board of Directors. Three directors are bankers. The other six directors are citizens who work outside banking. Six directors are elected by member banks in the district. The other three directors are appointed by the Board of Governors in Washington. Of the three directors appointed by the Board of Governors, one will serve as chair and one will serve as deputy chair of the Board.
[7:01]The Federal Open Market Committee, known as the FOMC, is the group within the Fed that sets monetary policy. The seven members of the Board of Governors and all 12 Reserve Bank presidents, including those who aren't voting members, attend FOMC meetings. Though they all participate in the discussions of the economy and policy options, only the seven members of the Board of Governors and five of the 12 Reserve Bank presidents are voting members at any one time. One of the five voting presidents is always the President of the Federal Reserve Bank of New York. The other Federal Reserve Bank presidents vote on the FOMC on a rotating basis. The Federal Open Market Committee is a group that has been charged with making decisions about the stance of policy. And it consists of the governors who serve on the Board of Governors and the 12 presidents of the Federal Reserve banks. And of those 12, all attend, but, um, five vote at any particular time. And, uh, the presidents, in particular, collect, um, a great deal of information about business conditions and labor market conditions, um, economic conditions, financial conditions in their districts. When we meet, we go around the table and each person describes their perspective on the economy, and my job as chair is to try to, um, find a consensus in the committee for, um, what is an appropriate stance of policy for the day. One really important thing to remember is that though the Federal Reserve is in part a government agency, it's independent within the government. To keep the Fed independent from political pressures, members of the Board of Governors are appointed for very long terms, 14 years. Also, elected officials and members of the president's administration cannot serve on the Board. Beyond that, the Federal Reserve doesn't get its funding through the congressional budgetary process, which can be influenced by politics. It's funding comes mostly from interest earned on government securities it holds, and the fees it charges for the financial services it provides. Monetary policy takes a long time to have its effects on the economy and actions we take today. May not have their full effects for two or three years or more, depending on the state of the economy. Whereas politicians, of course, are always looking to the next election, which could be only a few months away. So, it's really important that we not, uh, you know, be influenced by those political considerations, that we make our decisions based only on what's best for the U.S. economy, and only what's best in the longer term.
[10:00]Now, let's take a look at one of the three main purposes of the Fed. And that is to promote the integrity, efficiency, and accessibility of our country's payment system.
[10:12]Oh, hey there. Hi. How can I help you? How much are these again? These are $58.50. Good. I'll take them. Great. All right. Well, that'll be cash or credit? Cash. Perfect. Paying with cash is a simple transaction. The customer gets the merchandise and the store gets the money. But there's a lot going on behind the scenes to make that happen. And here's your change. One, two, three. Thank you. Most people don't see the payment system that supports the many ways we pay for goods and services. Cash, checks, credit cards, debit cards, and other means. Do you know who's very much involved in making sure payments are safe, secure, and efficient? Right. The Federal Reserve.
[10:59]To understand how it all works, let's look back in time. Paper money of one kind or another has been used for more than a thousand years. But in the United States, even long after the Revolutionary War, there was often no single paper currency that everyone in the country trusted. Different banks printed their own bank notes. So, how could you know what they were worth? You like the cow, eh? Cost you $10. A fair price. But, wait a minute. I never seen those before. What bank are they from? They're from Stormy Ridge Bank as you can see. Stormy Ridge Bank? I never heard of them. There was no uniform U.S. currency well into the 19th century. Does that mean you're not gonna sell me the cow? That made trade really cumbersome and confusing. Who would accept which currency and how much was it really worth? Bank notes across the country were denominated in dollars, but the further you got from the bank that issued them, the less likely it was that someone would give you a dollar's worth of goods or services for them. Today, there's just one official U.S. currency. All our paper money has Federal Reserve Note printed right on it. The Federal Reserve Board is in charge of issuing U.S. currency, turning paper into lawful money. The Federal Reserve banks distribute both currency and coins to financial institutions. We make sure that the payment system is safe, secure, uh, for the consumers in the region and nationally. The Federal Reserve plays a key role in the provision of many, but not all forms of payment. For example, there are other payment mechanisms, particularly card systems that the Fed doesn't have an operational role in. More often, moving funds is a matter of moving electronic information, not physical objects. Typically, checks are scanned and the front and back images, but not the paper checks themselves, are sent electronically or they're converted to electronic payments. There is another part of the payment system called Automated Clearinghouse or ACH. The Federal Reserve processes a huge amount of the electronic financial transactions, like direct deposits of people's paychecks. Fedwire is a system operated by the Fed that allows financial institutions to transfer large amounts of funds immediately to other financial institutions on behalf of their customers. You can think of payment systems as the plumbing for our economy. Payment systems facilitate the movement of money to support economic activity. So, for the U.S. economy to be effective, we require payment systems that are efficient, that are accessible, and that their users have confidence in. The Federal Reserve payments system takes care not only of private and business transactions, but also government transactions. The Fed is the fiscal agent for the U.S. government. That means it does things like maintaining the Treasury Department's bank account, as well as issuing, servicing, and redeeming government securities on behalf of the Treasury Department and its customers. Now you know. No matter how you pay for that pair of shoes or that cow, there's a very complex system working behind the scenes making sure payments are safe, secure, and efficient.
[14:32]What's another really important thing the Fed does? Personally, I think supervising and regulating all those thousands of financial institutions is pretty important. You're right, but why? I'd say because banks handle so much money and are so important to the whole economy, you can see why they need to be supervised and regulated. We supervise and regulate the banks in our region to make sure that they are safe and sound, because an ordinary citizen wants to make sure that when they put their money in the bank, it's safe. The Fed, in partnership with other federal and state agencies, supervises and regulates thousands of financial institutions. Some of these are bank holding companies, which are corporations that control banks, savings and loan holding companies, state chartered banks that are members of the Federal Reserve system, foreign branches of member banks, and the U.S. operations of foreign banks. Banks weren't always supervised and regulated the way they are today. In the early years of our country, there was very little supervision or regulation of banks at all, and most of that was by individual states, not the federal government. Most regulation was simply to make sure that banks had enough gold and silver in their vaults to back up their paper currency. But financial crises and panics took their toll. In 1893, a severe depression rattled the economy and eroded people's faith in banking. Then in 1907, a panic caused a number of banks to fail. Scary events like these helped bring about the passage of the Federal Reserve Act of 1913. One of the key purposes of this act was to establish a more effective supervision of banking in the United States. Well, the goal of supervision and regulation is fundamentally safety and soundness. Uh, this country before the Fed faced banking panics, uh, where people would lose confidence in their bank, run to get their money out very quickly. We called them bank runs or banking panics. And, of course, the banking panic of 1907, which was kind of the final straw, that prompted the creation of the Fed. Banking today is a lot more complex than it was in 1913. So bank supervision by the Federal Reserve has become even more necessary for keeping our economy stable. We're very focused on ensuring that we write rules to, um, force financial institutions to operate in a safe and sound manner.
[16:55]And we also involve, are involved in supervising institutions, both large and small, to, you know, make sure that they're operating safely and in accordance with those regulations. We recognize that banking is a risk business, but it is so very important from a supervisory standpoint to make that sure that those risks are easily measured. Those risks are monitored and that limitations are in place, that when they take risk, that they have taken measures to mitigate it. That they're prepared if something goes wrong. At times, like during the Great Depression that began in 1929, Congress has tightened regulations that affect banking. For example, the Banking Act of 1933, also known as the Glass-Steagall Act, allowed the Federal Reserve to regulate interest rates in savings accounts. In recent decades, some of the same regulations were loosened by Congress, like reversing the prohibition on banks having branches in other states. Then in 2010, Congress enacted the Dodd-Frank Act. That law significantly changed the Fed's role in supervision and regulation of financial institutions. It expanded the Fed's supervisory and regulatory responsibilities to include: savings and loan holding companies, certain non-bank financial firms, and payment clearing and settlement utilities. These institutions were seen as important to the stability of the whole financial system. Dodd-Frank also moved most of the Federal Reserve's responsibility for consumer protection to a newly formed Consumer Financial Protection Bureau. Too much regulation can stifle banks and inhibit lending, and can negatively affect the economic activity that comes from, from the availability of credit. Too little regulation on the other hand can lead to excessive risk taking and then banks can get into financial difficulties, which then can have a cause of financial instability or any institution.
[18:56]Now that we've seen the Fed's role in supervision and regulation, what would you like to talk about next? Okay, it's time to talk about monetary policy. Here's how the Fed itself defines monetary policy. 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. So, what is that supposed to mean? Well, let's break it down. It says that monetary policy is what the Fed does to quote, "influence the availability and cost of money and credit." Okay, they're influencing how easy it is to borrow and how much it cost. Right. The Fed does this to quote, "help promote national economic goals." Oh, like price stability and full employment. You got it. A simple way of thinking about monetary policy is what the Fed does to affect interest rates, and interest rates affect the whole economy. So, how does the Fed affect interest rates? By influencing the amount of money banks have to lend. Here's how it works. Suppose the economy is in recession. There's too little business activity and unemployment is rising. Right, a typical recession. Exactly. In this situation, the Fed may adjust its monetary policy by increasing the money supply. And wouldn't that tend to make credit more available at lower interest rates? Right. And that would encourage borrowing by consumers and businesses to do things like buy a car or expand operations. And that sort of activity expands the economy and reduces unemployment in the short run. So, in a recession, the Fed's monetary policy would likely increase the money supply. Yes. But in the opposite situation, suppose the economy is growing so fast that it causes inflation to rise. Then the Fed could adjust monetary policy the other way. And reduce the money supply, leading to increased interest rates and cooling off of the economy and lower inflation. Now I get it. It comes down to this. Monetary policy refers to the actions the Federal Reserve takes to help encourage a healthy economy. These actions influence the availability and cost of money and credit, which affect things like the prices of goods and services and employment. The FOMC meets in Washington at least eight times a year to review economic and financial conditions. Then it sets monetary policy. And how does it do that? By deciding whether or not to change its target for an important interest rate called the federal funds rate. And if so, by how much? But why is the federal funds rate so important to monetary policy? Because it affects interest rates banks charge each other and their customers. And that affects the economy as a whole. Even a quarter of a point rise or fall in the federal funds rate is a big deal. The goal of all the effort that goes into monetary policy is to help keep prices stable and to foster maximum employment. I have one more question for you. What's that? You said that the Fed implements its monetary policy by influencing the amount of money banks have to lend. How does it do that? Here's the basic way it works. Of course, in real life, it's a little more complex. But let's just say that you are the Federal Reserve. Okay, I'm the Fed. And you have all this money. Billions of dollars. I like that. Now, you're going to use some of your billions to buy these government securities. Which are things like bonds, government debt that people and institutions have as investments. So, I'm buying billions of dollars of these government securities. And you, the Fed, are paying for them with my money. Then what happens? The sellers you bought them from, put that money in their banks. I got it. Now the banks have billions more to lend, and that will push the interest rate lower. And if the Fed wants to raise interest rates, it sells some of its government securities. The buyers of those securities withdraw money from their bank accounts to pay for them, leaving the banks with less money to lend. So that's how monetary policy works. Not the only way, but it's one of the main ways the Fed conducts monetary policy. Is this the thing they called Open Market something? Open Market Operations. Got it.
