What Is the Purpose of the Federal Reserve Bank?

The Federal Reserve Bank (Fed) was founded in 1913 as the Central Bank for the United States. Its primary functions are to promote favorable monetary policy, serve as a primary source of supervision and regulation, conduct the daily operation of the Federal Reserve System and assist in the congressional oversight of its functions.

Monetary Policy

The most important purpose of the Fed is to promote a healthy economic environment by ensuring price stability, maximum employment and moderate long-term interest rates. The Fed is able to affect monetary policy and reduce shocks to the economy through the use of its economic instruments that change the supply of money and the availability of credit. For example, through the use of the Federal Open Market Committee (FOMC), the Fed can purchase back federal securities that tend to add money to the economy or sell securities which drains money. The same can be said for the discount window which adds money by cutting interest rates and reduces the money supply by raising interest rates.

Supervision and Regulation

The Fed implements and enforces legislation passed by Congress.

The Fed implements and enforces banking policies that are approved by Congress. For example, when Congress passes legislation dealing with truth in lending or savings, the Fed will draft the policies implementing the legislation and will then enforce the policies throughout the banking system. The Fed coordinates the examination process with other federal and state regulators. However, the Fed maintains direct supervision, examination and control over state-chartered Fed member banks, bank holding companies, U.S. operations of foreign banks and U.S. bank corporations that maintain operations in foreign countries.

Operations

The Federal Reserve banks provide banking services to the Fed's depository banks that include maintaining reserves and clearing accounts for banks. As mentioned above, the Fed manages the discount window as part of monetary policy. The Fed also provides wire transfer and check clearing services along with the taking and placing of currency and coins into and out of circulation. The Fed also plays a major role in the electronic transfer systems for originating and processing of debits and credits for banks.

Congressional Oversight

The Fed produces numerous reports for Congress.

The Fed produces numerous reports in order to assist Congress with its oversight of the Fed and the conduct of monetary policy. The Fed Board members frequently testify before Congress and the banking committee in order to clarify and report issues of great concern such as interest rate policy, inflation concerns and monetary control issues. The Fed also publishes its FOMC meeting minutes.

International Role

Globalization requires the Fed to relate its economic policies to the value of the U.S. dollar.

During the past 20 years or so, the Fed has become very involved in the international effects of U.S. monetary policy on foreign exchange rates and the value of the U.S. dollar compared to other currencies. For example, the lowering of the discount rate will increase money supply and lower U.S. interest rates. This in turn will lower the cost of goods exported from the United States to, for example, Europe which is based upon the euro. However, a lower U.S. dollar will make the cost of imports such as oil more expensive. Therefore, the actions of the Fed have far-reaching, global effects.

References

• CRS Report for Congress: Structure and Functions of the Federal Reserve System
• Federal Reserve Bank of San Francisco: The Role of the Federal Reserve Bank in the Economy
• Federal Reserve System Publications Catalog: Functions and Operations

Resources

• The Federal Reserve System: Purposes and Functions