The Federal Reserve at 100 A Look at its History and Future Niel Willardson Senior Vice President, General Counsel and Corporate Secretary October 9, 2014 29 th Annual Upper Midwest Automated Clearing House Association Meeting Helena Branch Board of Directors April 17, 2014 1
Goals Understand why the Fed was formed and how it is organized Understand key roles of the Fed and how these roles have changed Provide some perspectives on the future in light of history Answer commonly-asked questions 2
Disclaimer The views expressed here are the presenter s and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System 3
Before the Federal Reserve Act Instability and financial panics Crisis of 1907 J.P. Morgan National Monetary Commission Nelson Aldrich and Jekyll Island 4
The Federal Reserve Act Enacted December 23, 1913 Covers major Federal Reserve functions Provided for the Board of Governors and Reserve Banks 5
Purpose of the Federal Reserve Act An Act to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes. FRA Official Title 6
Functions of the Federal Reserve System Conduct monetary policy Maintain the stability of the financial system Regulate and supervise banking institutions Provide financial services to depository institutions and the U.S. Government 7
Federal Reserve Structure is Designed to Strike a Balance National System Central Policy Government Regional Variation Local Input Private *Politically Independent *Accountable and Transparent 8
Board of Governors Appointment of Members Seven members Appointed by the President with consent of the Senate Staggered terms of 14 years Budget Not appropriated by Congress self-funded An independent, governmental body to formulate central monetary policy for a national economy 9
Members of the Board of Governors Janet Yellen Chair Lael Brainard Jerome H. Powell Daniel Tarullo Stanley Fischer 10
Federal Reserve Districts The Federal Reserve Act calls for the Reserve Bank Organization Committee to designate not less than eight nor more than twelve cities to be known as Federal reserve cities... to serve as the operating arms of the central bank. 11
Drawing the Boundaries: Guiding Principles Create different and independent institutions Create institutions similar in size Each district to have minimum capital of $4 million Site the headquarters banks for convenience and financial efficiency 12
Formation Headlines: Minneapolis vs. St. Paul 13
Federal Reserve Districts capture diversity of regional conditions and perspectives 14
Federal Reserve Districts U.S. Railroads in 1900 ensure financial efficiency 15
Federal Reserve Districts Population Density - 2011 reflect capital resources 16
Federal Reserve Banks 12 Reserve Banks opened November 21, 1914 Each acts as a depository for the banks in its District Incorporated with traditional corporate powers Stockholders are member banks 17
Federal Reserve Bank Membership 18 18
Reserve Bank Governance Represent Member Banks A B Represent the Public C 6 Elected by District Member Banks 3 Appointed by BoG May not own stock in a bank May not be an employee or officer of a bank 19
Board of Directors Minneapolis Fed A A B C A Kenneth Palmer Range Bank Larry Simkins The Washington Companies Chair Randy Hogan Pentair Catherine Kelly Minnesota Bank and Trust C B B C A Deputy Chair MayKao Hang Amherst Wilder Foundation Christine Hamilton Christiansen Land and Cattle Howard Dahl Amity Technology Ken Powell General Mills Randy Newman Alerus Financial 20
Board of Directors Helena Branch A Deputy Chair David Solberg Seven Blackfoot Ranch Company Duane Kurokawa Western Bank of Wolf Point Tom Swenson Bank of Montana Barbara Stiffarm Opportunity Link, Inc. Chair Martha Goetting Montana State University 21
Purposes of Reserve Banks Operating arms of the central bank Help formulate and implement monetary policy Help maintain the stability of the financial system Supervise member banks and bank holding companies in their districts Provide services for the banking system 22
Monetary Policy The original Act: provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper Backdrop was financial panic; focus was financial stability 23
Today: Federal Open Market Committee (FOMC) Monetary policy in the United States is formed through the FOMC. Made up of: The seven members of the BoG The president of the FRB-New York Four other RB presidents rotating But it hasn t always been this way 24
Early Days Bank Emphasis 1930 BOG replaces OMIC with Open-Market Policy Committee All 12 banks represented Timeline Changes in FOMC 1913 Federal Reserve Act 1933 Congress replaces OMPC with Federal Open Market Committee All 12 banks members Decisions binding 1910 1920 1930 1940 1950 2010 2020 Mid-1920s Reserve Banks voluntarily form Open-Market Investment Committee New York, Cleveland, Chicago, Philadelphia, Boston 1935 FOMC composition changes 7 BOG members plus 5 FRB presidents in rotating schedule 1942 to present New rotation groups 7 BOG FRB New York permanent member BOS/PHL/Rich CLEV/CHI ATL/DAL/STLs MPLS/KC/SF Since 1935 Board of Governors Majority 25 Graphic by Niel Willardson and Janet Malik Federal Reserve Bank of Minneapolis
The Dual Mandate The Board and FOMC shall maintain long run growth of the monetary and credit aggregates commensurate with the economy s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates. Dual mandate guides us today 26
Functions of the Federal Reserve System Conduct monetary policy Maintain the stability of the financial system Regulate and supervise banking institutions Provide financial services to depository institutions and the U.S. Government 27
Maintaining Stability Discount window lending Supervision and regulation Monetary policy Lessons learned from the Great Depression led to aggressive monetary policy and innovative liquidity programs in 2007-2009, all consistent with the Federal Reserve Act. 28
Discount Window Functions as a safety valve Helps relieve short-term, non-critical liquidity strains Is a routine function of Reserve Banks 29
Functions of the Federal Reserve System Conduct monetary policy Maintain the stability of the financial system Regulate and supervise banking institutions Provide financial services to depository institutions and the U.S. Government 30
Supervision and Regulation Fed supervises Bank/financial holding companies and thrift holding companies State member banks Other entities Post Dodd-Frank role for Systemically Important Financial Institutions in order to Monitor compliance with regulations Identify risks and vulnerabilities Provide guidance to financial institutions 31
Functions of the Federal Reserve System Conduct monetary policy Maintain the stability of the financial system Regulate and supervise banking institutions Provide financial services to depository institutions and the U.S. Government 32
Fed is a banker s bank Currency and coin ordering and depositing Automated Clearing House transactions Check clearing Wire payments Providing Financial Services Fed is the government s bank Savings Bonds and Treasury Auctions 33
Evolution of Fed Payments FedACH as an Example 1913 Federal Reserve Act other purposes financial efficiency 1976 Fed establishes Electronic Funds Transfer 1995 FedACH 2001-2009 FedACH consolidation and enhancements increase efficiency 1910 1920 1970 1980 1990 2000 2010 2020 1974 NACHA 1972 Paper check volume explodes First ACH clearinghouses Special committee on paperless entries (SOAP) 1980 Monetary Control Act Depository institutions subject to reserve requirements and granted equal access to FRB services FRBs required to charge for payment services to fully recover cost to provide 34 Graphic by Niel Willardson and Janet Malik Federal Reserve Bank of Minneapolis
Federal Reserve Structure is Designed to Strike a Balance National System Central Policy Government Regional Variation Local Input Private *Politically Independent *Accountable and Transparent 35
Accountability Federal Reserve Act provides necessary checks: Congressional oversight Annual independent audit of the financial statements of each Reserve Bank and the Board of Governors 36
Accountability and Transparency Government Accountability Office conducts reviews Office of Inspector General conducts audits and investigations including delegated functions 37
Transparency Policy statement immediately after each FOMC meeting Meeting minutes after three weeks Press conferences Green Books and Blue Books on BoG Website 38
Transparency Congressional testimony and reports Reports on BoG and FRB public websites see http://www.newyorkfed.org/markets/opolicy/operating_policy_140319.html Speeches by Fed chair, governors and FRB presidents 39
Central Bank Public Servant 40
Central Bank Public Servant 41
References Bank for International Settlements, Central Bank Oversight of Payment and Settlement Systems, 2005. http://www.bis.org/cpmi/publ/d68.htm Board of Governors of the Federal Reserve System History Gateway http://www.federalreservehistory.org Board of Governors of the Federal Reserve System, Discount Window Lending, http://www.federalreserve.gov/newsevents/reform_discount_window.htm and http://www.frbdiscountwindow.org/discountwindowbook.cfm?hdrid=14&dtlid=43 Board of Governors of the Federal Reserve System, The Federal Reserve System Purposes & Functions, http://www.federalreserve.gov/pf/pdf/pf_complete.pdf Board of Governors of the Federal Reserve System, Federal Reserve s Objectives in Conducting Monetary Policy, http://www.federalreserve.gov/faqs/money_12848.htm Bordo, Michael D. and William Roberds, eds. The Origins, History, and Future of the Federal Reserve. New York: Cambridge University Press, 2013. 42
References Federal Reserve Bank of Kansas City, Beyond the Federal Reserve Act, http://kansascityfed.org/publicat/ten/pdf/fall2013/ten_owen.pdf Federal Reserve Bank of New York, The Founding of the Fed, http://www.newyorkfed.org/aboutthefed/history_article.html National City Bank of New York, Federal Reserve Act, the National-Bank Act, and All Other Federal Laws Relating to Banking, http://fraser.stlouisfed.org/docs/publications/books/franba_ncbny_1914.pdf Hammes, David. Locating Federal Reserve Cities and Districts, The Region, September 2001. http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3434.&& Meltzer, A. H. A History of the Federal Reserve, Chicago: University of Chicago Press, 2004. Steelman, Aaron. The Federal Reserve s Dual Mandate: The Evolution of an Idea. Economic Brief EB11-12, December 2011. https://www.richmondfed.org/publications/research/economic_brief/2011/eb_11-12.cfm Wheelock, David C. The Fed s Formative Years, http://www.federalreservehistory.org/events/detailview/60 43