[MUSIC PLAYING] Hi, I'm Penny,
your personal tour guide to the Federal Reserve. I'm here to introduce
you to one of the most complex but effective
institutions in the United States. But don't worry, I'll explain
it all in plain English. Here is a road map
of where we're going. Together, we'll walk through
the Federal Reserve System, literally. And along the way, I'll show you
just what goes on around here and why it's important. By the end of this
tour you, too, will be able to
explain the Federal Reserve in plain English. As you can see, there's a
lot going on around the Fed, but keep in mind that
the whole is really just the sum of the parts. Basically, the Federal Reserve
is made up of three parts: the Board of Governors, that's
the building in the middle; the reserve banks, those
are the 12 other buildings; and the Federal Open
Market Committee. The complex design
of these three parts is actually tied to how the Fed
was created in the first place. To understand this
structure better, let's first step
back about 100 years. You've probably
heard of the bank failures that occurred during
the late 1800s and early 1900s. Back then, the
failure of one bank often had a domino effect in
which customers of other banks rushed to withdraw funds
from their own banks. These banking
panics wreaked havoc even on financially sound banks
and sometimes paved the way to serious widespread
economic recessions. When Congress wrote the
Federal Reserve Act in 1913, one objective of
the Fed was to help banks acquire emergency cash
reserves to meet such panic withdrawals so that the
shortage of funds at one bank didn't disrupt the
entire banking system. This function
would go a long way in establishing confidence
in the banking system and more stability in
the economy overall. Another goal of the Fed was
to make it easier and faster to make payments, especially
between different parts of the country. To achieve these goals,
the Fed, then and now, combined central
national authority through the Board of Governors. Remember that on the map? With a healthy dose of
regional independence through the reserve banks. A third entity, the Federal
Open Market Committee, brings together the
expertise of the first two in setting the nation's
monetary policy. OK, that was a mouthful. Let me see if I can
make better sense of it. Let's take a walk through
some of the places that make up the Fed, where you
can see firsthand what we do. I'm here now in
Washington, D.C. Behind me is the Board of Governors, which
is a U.S. government agency. The board has seven
members, called governors, who are appointed by
the U.S. president and confirmed by
the U.S. Senate. One thing the governors
do is write regulations to make commercial banks
financially sound, which help make the nation
economically strong. It's the governors' jobs, along
with economists and support staff, to study
trends in the economy and to help forecast
the country's future economic direction. The governors also oversee
those 12 reserve banks I showed you earlier. One important responsibility
of the governors is participating on the Federal
Open Market Committee, or FOMC. Speaking of the FOMC,
the meeting room is right next door. Let's take a peek inside. I think a meeting
is just wrapping up. Looks like we're right on time. Straight ahead is the
FOMC, the Fed's chief body for monetary policymaking. Here, the seven governors
from the Board of Governors meet with the presidents
of the 12 reserve banks about eight times
a year to discuss the current state of
the economy and how to promote maximum
employment and stable prices. While everyone here
participates in the discussion, only the voting members
actually vote on any actions that the FOMC can take to
influence monetary policy. Oh, and when I say
voting members, I mean the seven board
governors plus the president of the Federal Reserve Bank of
New York and four other reserve bank presidents who serve
on a rotating basis. As we've just seen, each
FOMC meeting ends with a vote on actions that will
affect key interest rates, which then influence consumers'
and businesses' spending and investment decisions. We'll talk about this
more in a minute. Before we do that though,
let's follow this reserve bank president back to the office
to see what goes on there. Buckle up, we're headed west. In all, there are 12 districts
in the Federal Reserve, and each is served by a
regional reserve bank. Many also have one
or more branches. As we'll see, reserve banks have
three main responsibilities: providing financial services,
contributing to monetary policy and supervising
commercial banks. Don't worry if you didn't catch
that the first time through. We'll take a look at each of
these activities one by one. First, let's head to the
financial services area and see why a reserve bank is
often called the banker's bank. This floor is busy
around the clock, which shouldn't surprise you. This is where the Fed's task of
providing a safe and efficient method for transferring money
throughout the banking system takes place. Every day, banks
deposit billions of dollars at the Fed in
cash, checks, wire transfers or some other form
of electronic payment for many of the same reasons
we consumers use a bank. In addition, reserve banks
offer payment services to all financial institutions
in the United States, no matter what their size or location. For example, that fast-paced
clicking sound you hear is a high-speed machine
that sorts thousands of pieces of
currency every minute and checks for
counterfeit bills. It also shreds old
bills and where places them with new ones. The cash has been delivered
to banks that need it. And over there,
through the glass, you can see the computers that
transfer money electronically from one bank to another. Companies offer these
services as well, but the Fed is a primary
player in the business. By the way, even though the Fed
competes with other businesses in the financial
services it provides, the Fed stays in the
marketplace primarily to promote
competition, innovation and overall efficiency. Besides serving
commercial banks, reserve banks also serve as
banks for the U.S. government. We maintain accounts
for the U.S. Treasury, process government checks,
and assist the Treasury in issuing and
redeeming securities. There's plenty more information
about this on our website. It's getting noisy
on this floor, let's go visit the
research department where it's a little quieter. As you might guess, one of the
most important jobs at the Fed is to help keep our
economy healthy. We do this by conducting
monetary policy. This isn't easy to
explain, but let me start by telling you
what the economists do. Economists at the
reserve banks are experts on different aspects
of our national economy. These economists contribute
to a broad exchange of ideas across the
Federal Reserve System. If you hang out in this
department for a while, you'll notice that
economists often hold firmly to their individual
opinions and are known to debate their points
of view with one another. Despite their
varying perspectives, most economists agree,
though, that the economy performs well when
inflation is low and stable. As a result, low inflation is
a long-term goal of the Fed. So what do the economists
do with their research? A lot of publishing and
a lot of public speaking before all types of audiences. But their most important job is
to prepare their reserve bank president for the FOMC
meetings we poked our heads in on earlier. At the FOMC meetings,
members together set a target range for
its policy interest rate called the federal
funds rate, which is the interest rate on
overnight loans between banks. This rate influences
other interest rates, like those for mortgage
loans, and greatly affects the direction of the economy. To ensure the federal funds rate
stays within the FOMC's target range, the Fed has
monetary policy tools, such as the interest rate it
pays to banks on their reserve balances, that can be used
to steer the federal funds rate into the
FOMC's target range. Speaking of interest rates
in the banking system, let's tag along with
this bank examiner heading out to a
commercial bank. To see what examiners do,
you have to hit the road. As you might recall, Congress
created the Federal Reserve to foster safe, sound
and competitive practices in the nation's banking system. To accomplish this, the Fed both
regulates the banking system and supervises certain types
of financial institutions. In case you're
wondering, these types include state-chartered member
banks, bank holding companies, which are the companies
that own banks, and international
organizations that do banking business in the United States. There are other types
of banks that are supervised by other regulators. What's the difference between
regulation and supervision? Bank regulation refers
to the written rules that define what is
acceptable behavior for financial institutions. The Board of Governors
in Washington, D.C., takes care of this
responsibility. Supervision refers
to the enforcement of these rules, which is carried
out by staff at the 12 reserve banks. Fed examiners, like those
here, visit commercial banks and look over the bank's
financial statements to evaluate the quality of
assets, internal controls and ability to manage risk. Why do you care? Because you've got
money in this bank. The examiners' job is to
make sure your money is safe and sound. Examiners also review
a bank's performance in complying with
federal and state laws. At the end of an on-site
review, Fed examiners issue the bank a
rating that reflects whether the institution
is in good shape or whether it has
weaknesses that require corrective action
and close monitoring. One of the most important
ways that the Fed ensures safety and soundness
of the banking system is by helping banks respond
to all kinds of crises. One way the Fed does
this is by making short-term loans to banks
through its discount window. This not only helps individual
banks and their customers, but also ensures that a shortage
of funds at one institution does not disrupt the
flow of money and credit in the entire banking system. Well, here we are at
the end of our journey. As promised, I've introduced
you to the three big stops on the Fed tour: the Board of
Governors, the FOMC and the 12 reserve banks. I've also described our
three main responsibilities: providing financial services,
conducting monetary policy and supervising banks. I hope my
plain-English style has helped you make sense of the
complex, yet effective, design of the Federal Reserve
System and how we contribute to a healthy economy. And hey, if you want
more information, visit
FederalReserveEducation.org and tell them Penny sent you.
