1. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. CHAPTER 5 The Overseer: The Federal Reserve System

2. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Organizational Structure of the Federal Reserve System Board of Governors Seven members appointed by the president of the United States and confirmed by the Senate for 14- year terms. One of the seven governors is appointed chair by the president of the United States and confirmed by the Senate for a 4-year term. The Board of Governors appoints three of the nine directors to each Reserve Bank. Twelve Federal Reserve Banks Each with nine directors who appoint the Reserve Bank president and other officers of the Reserve Banks. Federal Open Market Committee (FOMC) Seven members of the Board of Governors plus the president of the New York Fed and presidents of four other Reserve Banks. Nearly 5,000 Member Commercial Banks Elect six of the nine directors to each Reserve Bank.

3. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Functions of the Fed Actions taken to improve the health of the economy Actions taken to ensure the safety and soundness of the financial system Actions taken to ensure the safe and efficient transfer of funds including clearing checks and providing sufficient currency and coin Maintains the Treasury’s transactions account FUNCTIONS OF THE FED Formulates Monetary Policy Facilitates the Payments Mechanisms Supervises and Regulates the Financial System Acts as Federal Agent for the U.S. Government

4. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Check-Clearing System Mary writes checks to Dad Dad’s bank Mary’s bank Dad receives and deposits check Federal Reserve Bank check check deposited check forwarded check canceled

5. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Division of Responsibility within the Federal Reserve System Board of Governors (7 Appointed Members) Sets reserve requirements and approves discount rates as part of monetary policy Supervises and regulates member banks and bank holding companies Establishes and administers protective regulations in consumer finance Oversees Federal Reserve Banks Federal Reserve Banks (Reserve Banks) (12 Districts) Propose discount rates Lend funds to depository institutions (discount policy) Furnish currency Collect and clear checks and transfer funds for depository institutions Handle U.S. government debt and cash balances Federal Open Market Committee (Board of Governors plus five Federal Reserve Bank Presidents) Directs open market operations (Buying and selling of U.S. government securities which are the primary instrument of monetary policy SOURCE: The Federal Reserve System: Purposes and Functions (Washington, D.C.: Board of Governors of the Federal Reserve System, 1984): 5.