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Money Advisor Wealth Management

Money Advisor Wealth Management

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A Federal Reserve System primer

A Federal Reserve System primer…Last Wednesday, vice chair of the Board of Governors of the Federal Reserve Janet Yellen was nominated to take over as Chairman when Ben Bernanke steps down in January. If confirmed, she’ll take the helm of the institution entrusted with safeguarding the U.S. monetary and financial system.

U.S. Congress established the Federal Reserve System a century ago in response to the financial panic of 1907. According to the Federal Reserve Bank of Boston:


“Financial panics and bank runs were all too common during the 19th and early 20th centuries. Some were more severe than others, but most followed the same general pattern. The misfortunes of a prominent speculator would undermine public confidence in the financial system. Panic stricken investors would then scramble to cut their losses. And, because it wasn’t uncommon for speculators to double as bank officials, worried depositors would rush to withdraw their money from any bank associated with a troubled speculator. If a beleaguered bank couldn’t meet its depositors’ demands for cash, panic would quickly spread to other banks. (Remember! There was no federal deposit insurance until 1933. If a bank failed, depositors had little hope of ever seeing their money again.)


The panic of 1907 ended when J.P. Morgan intervened and set up emergency loans for financial institutions. The clamor for reform led to the passage of the Federal Reserve Act (which created the Federal Reserve System (Fed), which became law in 1913.


Today, the Fed includes a Board of Governors in Washington, D.C. and 12 Federal Reserve Banks. The Board of Governors oversees the Fed. Its members are appointed by the President of the United States and confirmed by the Senate. They serve 14-year terms. The Reserve Banks are responsible for the Fed’s day-to-day operations which include “conducting monetary policy, supervising and regulating banks, and providing payment services all help maintain the stability of the financial system.”


Monetary policy is set by the Federal Open Market Committee (FOMC) which is composed of 12 voting members and includes the seven members of the Board of Governors and a rotating group of five Reserve Bank presidents. The chairman of the Board of Governors is also the chairman of the FOMC.


Weekly Focus – Think About It


“The greatest thing in family life is to take a hint when a hint is intended – and not to take a hint when a hint isn’t intended.”

Robert Frost, American poet

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