The Federal Reserve

I'm Shirley Griffith. And I'm Sarah Long with the VOA Special English program, THIS IS AMERICA. Today, we tell about America's Central Bank, the United States Federal Reserve.

On October second, the Federal Reserve Open Market Committee reduced federal interest rates for the ninth time this year. Federal interest rates are now at their lowest level since Nineteen-Sixty-Two. The action was taken because of the damage to the American economy caused by the terrorist attacks last month. Experts believe that reducing interest rates can help the economy grow.

Most people know that the Federal Reserve controls interest rates. Yet, fewer people know how the Federal Reserve influences banking and the economy.

America's Central Bank is part of a larger financial system called the United States Federal Reserve System. It is not a single bank, but a banking system with operations that are both public and private. Its purpose is to control the flow of money in the economy, to supervise banking activity and to protect the financial system.

The Federal Reserve System includes the Federal Reserve Board of Governors and the twelve Federal Reserve banks. The Board of Governors is, in fact, a government agency that reports to Congress. The Board of Governors is a committee of seven people. However, only five members currently are serving on the Federal Reserve Board.

The president of the United States appoints Federal Reserve Board members to fourteen-year terms. Members may serve only one term. The president also appoints the chairman and vice chairman of the board to four-year terms.

The chairman is often reappointed several times. The current chairman, Alan Greenspan, has served since Nineteen-Eighty-Seven. There have been only thirteen chairmen since the Federal Reserve System was created in Nineteen-Thirteen.

The Federal Reserve Board chairman has national responsibilities, such as reporting to Congress on the economy. He also serves as an international representative of the American banking system.

The Board of Governors supervises the general activities of the Federal Reserve System. However, the Federal Open Market Committee makes decisions that change the economy. The committee has twelve members. They are the seven members of the Federal Reserve Board and five Reserve Bank Presidents. By law, the Open Market Committee must meet four times every year. However, it has met at least eight times a year since Nineteen-Eighty.

The Open Market Committee makes decisions about America's money supply. It considers reports from special committees and a huge amount of economic information provided by the Reserve Banks. This information is presented to committee members during their meetings. Often, the meetings are not open to the public because the discussions could have unwanted effects on the economy.

The twelve Federal Reserve Banks are the other part of the Federal Reserve System. They are called the "twelve district branches" and serve large areas of the country. These banks lend money to other banks that are part of the Federal Reserve System. But, fewer than half of America's banks are members of the Federal Reserve System.

When the Federal Reserve System began, each District Bank set its own interest rate. The lawmakers who wrote the legislation that created the system wanted each area of the country to be financially independent. Virginia Senator Carter Glass was one of those congressmen. He once said that the purpose of the Federal Reserve Act was to avoid creating a central bank. Yet today, all the reserve banks keep the same rates and are closely supervised by the Board of the Federal Reserve.

The Open Market Committee controls two important rates of interest. One is the rate charged by the Federal Reserve. Banks may borrow directly from the Federal Reserve at a reduced rate to change the level of their money reserves.

Lending at a reduced rate was the most common way for the Federal Reserve to influence the supply of money early in its history. The special rate was designed to help troubled banks pay people who withdrew money in times of crisis.

The most important interest rate controlled by the Open Market Committee is called the "Federal Funds rate." Banks pay this rate when they borrow from other banks in the Federal Reserve System for very short periods. The Open Market Committee does not change the Federal Funds rate in one action. The committee announces a target rate and slowly reduces the rate until the target is reached.

One way that the Federal Reserve changes interest rates is through "open market operations." The Open Market Committee orders the Federal Reserve to buy or sell government debt in financial markets in New York. The government does business with more than thirty companies that trade government debt.

The financial instruments used in this process are called government securities. Government securities are loans to the government that are "secured" by the government's ability to tax. Government securities are bought and sold in huge amounts in financial markets. In fact, more than ten-thousand-million dollars in government securities are traded every day.

The Federal Reserve buys government securities when it wants to lower interest rates. Interest rates generally go down because there is an increased supply of money for lending.

However, the Federal Reserve requires banks to hold more money "in reserve" as the amount of money they hold increases. Money held in reserve cannot be loaned out. It must be kept in some safe form in case of an emergency. Reserve requirements help to balance interest rates as the Federal Reserve buys or sells debt in the open market.

The Federal Reserve can also affect interest rates by changing requirements for banks. Banks can be required to increase or reduce the percentage of money they hold in reserve. Increasing the percentage of reserve money that banks must hold can cause interest rates to go up.

The idea of a central bank is not a recent one. The first Central Bank was started in Sweden in Sixteen-Fifty-Six. The Riksbank was a private bank. Yet the Swedish legislature gave it the power to print money. The Federal Reserve is like that first central bank in many ways.

American dollars are "Federal Reserve Notes." All of the Federal Reserve Branch banks are private banks owned by the owners of their stock. And, the Federal Reserve Board reports to Congress as a government agency.

Yet the Federal Reserve System is always changing to meet the needs of America's financial community. For example, in Nineteen-Eighty, Congress passed the Monetary Control Act. It required all financial institutions to keep reserve money with the Central Bank. At the time, only banks that were members of the Federal Reserve System had to hold reserves with it. However, by the Nineteen-Seventies many member banks were leaving the system because the federal requirements reduced the amount of money they could lend. The Monetary Control Act expanded the power of the Federal Reserve to control non-member banks.

The Federal Reserve has become more powerful and centralized since it was created in Nineteen-Thirteen. Yet the Federal Reserve has increased the amount of information it makes public. Before Nineteen-Seventy-Eight, the chairman of the Federal Reserve Board did not speak to Congress often. An act of Congress directed the chairman to speak to Congress twice a year to report on the economy.

The Federal Reserve now makes public much of the large amount of economic information it gathers. For example, the Federal Open Market Committee began to announce a "target rate" in Nineteen-Ninety-Five. In many ways, America's Central Bank has become more important as it has become more open to the public.

This program was written Mario Ritter. It was produced by Cynthia Kirk. I'm Sarah Long. And I'm Shirley Griffith. Join us again next week for another report about life in the United States on the VOA Special English program, THIS IS AMERICA.