Who Really Owns the Federal Reserve?
Is It a Secret Conspiracy to Create a One World Bank?
The Federal Reserve is the central bank for the United States. Its decisions affect the U.S. economy, and therefore the world. This position makes it the most powerful actor in the global economy. It is not a company or a government agency. Its leader is not an elected official. This makes it seem highly suspicious to many people because it is not subject to either voters or shareholders.
Who Owns the Federal Reserve?
The Federal Reserve is an independent entity established by the Federal Reserve Act of 1913. At that time, President Wilson wanted a government-appointed central board. But Congress wanted the Fed to have 12 regional banks to represent America's diverse regions. The compromise meant the Fed has both.
The president and Congress must approve all members of the Federal Reserve Board of Governors. But, the board members' terms deliberately don't coincide with those of elected officials. The president appoints the Federal Reserve Chair, currently Jerome Powell. Congress must approve the president's appointment. The Chair must report on the Fed's actions to Congress.
Congress can alter the statutes governing the Fed. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act limited the Fed's powers. It requires the Government Accountability Office to audit the emergency loans the Fed made during the 2008 financial crisis. It also required the Fed to make public the names of banks that received any emergency loans or TARP funds. It also required the Fed to get Treasury Department approval before making emergency loans, as it did with Bear Stearns and AIG.
The Board is an independent agency of the federal government. But its decisions don't have to be approved by the president, legislators, or any elected official.
Equally as important, the Fed does not receive its funding from Congress. Instead, its funds come from its investments. It receives interest from U.S. Treasury notes it acquired as part of open market operations. It receives interest on its foreign currency investments. Its banks receive fees for services provided to commercial banks. These include check clearing, funds transfers, and automated clearinghouse operations. The Fed also receives interest on loans it makes to its member banks. The Fed uses these funds to pay its bills, then turns any "profit" over to the U.S. Treasury Department.
The 12 regional Federal Reserve banks are set up similarly to private banks. They store currency, process checks, and make loans to the private banks within their area that they regulate. These banks are also members of the Federal Reserve banking system. As such, they must maintain reserve requirements. In return, they can borrow from each other at the fed funds rate when needed. They can also borrow from the Fed's discount window at the discount rate as a last resort.
To be a member of the Federal Reserve system, commercial banks must own shares of stock in the 12 regional Federal Reserve banks by law. But owning Reserve bank stock is nothing like owning stock in a private company. These stocks can't be traded. These don't give the member banks voting rights. These pay out dividends mandated by law to be 6 percent. But the banks must return all profits, after paying expenses, to the U.S. Treasury.
Why the Fed Must Remain Independent
The Fed's monetary policy can do its job better when it is shielded from short-term political influence. It must be free to set expectations, especially about inflation. It cannot do this when its leaders are worried about being fired by an elected official.
Except for one, all Fed chairs have been prominent academic economists. Their expertise is in public policy, finance, and central banking. They are valued for that expertise, not for charisma, a large fan base, or public speaking skills. They are used to an environment where ideas are rationally discussed, debated, and evaluated. If the Fed were beholden to the politics of the day, it could not attract people of that professional caliber.
How the Fed Is Held Accountable
Although it is independent, the Fed is still accountable to the public and to Congress. The Fed can best guide expectations if it is transparent about its actions. It must also clearly communicate its reasons for its actions.
It communicates through frequent and detailed reports. First, the Fed chair and other board members testify frequently before Congress. Second, the Fed submits to Congress a detailed Monetary Policy Report twice a year. Third, the FOMC publishes a statement after each meeting. It also provides detailed meeting minutes three weeks later. Verbatim transcripts are available five years later.
How the Fed Works
The Fed's primary function has been to manage inflation. The Fed has a variety of tools to accomplish this. During the financial crisis, it created innovative tools to avert a depression. Since the recession, it also pledged to reduce unemployment and spur economic growth.
The Fed works by using its monetary policy tools. Setting low-interest rates is called expansionary monetary policy. It makes the economy grow faster. If the economy grows too fast, it triggers inflation. Increasing interest rates is called contractionary monetary policy. It slows economic growth by making loans and other forms of credit more expensive. This restricts the money supply. As demand falls, businesses lower prices. This creates deflation. That further lowers demand because consumers delay buying while waiting for prices to fall further.
How does the Fed cut interest rates? It lowers the target for the fed funds rate. Banks usually follow the Fed's lead, cutting Libor and the prime interest rate. The Fed can also use its other tools, such as lowering the discount rate banks use to borrow funds directly from the Fed's discount window.
To combat the financial crisis, the Fed got creative. It bought mortgage-backed securities from banks directly as a way to pump liquidity into the financial system. It also started buying Treasurys. Both purchases became known as quantitative easing.
Critics worried that the Fed's policies would create hyperinflation. They argued that the Fed was just printing money. But banks weren't lending, so the money supply wasn't growing fast enough to cause inflation. Instead, they hoarded cash to write down a steady stream of housing foreclosures. The situation didn't improve until 2011. By then, the Fed had cut back on quantitative easing.