THE FEDERAL RESERVE BOARD
Alan Greenspan and the Federal Reserve Board have been in the news a lot lately, especially as Chairman Greenspan tries to fend off a looming recession with interest rate cuts. To many people, the Federal Reserve Board is a somewhat enigmatic institution, with few of us understanding what it does. Economists often debate how much of an impact it has had on and how responsible Alan Greenspan is for the longest economic boom in U.S. history. To help provide some answers, THAT MONEY SHOW's One Minute MBA takes an inside peek.
Created in 1913 by the Federal Reserve Act, the Federal Reserve Board, otherwise known as the Fed, acts as the central banking authority of the United States. The Fed consists of the Board of Governors of the Federal Reserve System, the 12 Federal Reserve banks, the Federal Open Market Committee, the Federal Advisory Council, and a Consumer Advisory Council.
The Fed supervises and regulates U.S. banks, maintains the stability of banks, and offers services such as clearing checks and acting as a center for foreign exchange. However, the Fed's most important role is controlling the nation's monetary supply, which has a direct affect on the economy.
The Fed is authorized to change the amount of money that U.S. banks must keep on reserve in the Federal Reserve banks. This is known as the reserve ratio, and what's left over determines how much money banks have available to lend. The twelve Federal Banks are privately held corporations created in the public interest. Each bank has nine directors. Three are elected by the member banks and six are appointed by the Fed. The banks are located in New York, Boston, Philadelphia, Chicago, San Francisco, Cleveland, Dallas, Richmond, VA, Atlanta, St. Louis, Minneapolis, and Kansas City, MO.
Something consumers are familiar with is the Fed's control of interest rates. Interest rates are set by the Federal Open Market Committee. When rates are down, credit is cheaper, and this lowers interest rates for payment on consumer, corporate and bank loans. This makes doing business cheaper and stimulates economic activity. Typically, rates are increased in order to slow down the economy and prevent inflation or they are lowered to boost the economy, as we have recently seen, when things appear to be slowing down.
How much effect the Fed's tinkering with our economy has on our prosperity is, as with most things economic, still up for debate. No matter what, Federal Reserve Board decisions are always hotly anticipated by the media, analysts, and consumers.
To hear professor Marvin Zonis, from the University of Chicago Graduate School of Business, talk about the Fed, check out our One Minute MBA video clip. Just click the appropriate connection speed in the video box on the right column of this page.