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The Fed Explained


The Fed Explains Regional Banks

The United States is a big place. Our regions are diverse in terrain, population, and economies. In setting national economic policy, we need a way to understand economic conditions in all the regions of the country. At the Federal Reserve Bank, we do just that. Our economists use great tools and analysis in studies and statistical evidence. But even with all those tools and all that analysis, we still don't have enough information to see the whole picture. When we really want to know what's going on in each state, in each part of the country, we need to get down to the grassroots level. Let's start at the beginning.

The Fed is the U.S. central bank. A central bank is an organization that's responsible for overseeing the monetary system of a nation. Most countries have one. What makes our U.S. central bank different? We are one of the few decentralized central banks in the world. That means we are geographically diverse.

Our central bank is made of 12 reserve banks as well as the Washington, DC-based Board of Governors. It was created that way in 1913 and remains that way today. Why is this structure still useful? Because when our job is to consider all aspects of this complex economy, we want to make sure we are getting economic information from everywhere—not just the cities, not just the farmlands, but from all over the nation, East Coast to West, north to south, and in the middle. That's why all the Federal Reserve Banks collect information about what's going on in their regional economies.

About every six weeks in Washington, DC, the heads of the 12 regional Reserve Banks get together with seven politically appointed members of the Board of Governors. This meeting is called the Federal Open Market Committee, or the FOMC. Here, the presidents share economic information and viewpoints on monetary policy. Monetary policy strongly influences interest rates and the flow of credit. The presidents bring their models, data, and forecasts to these meetings. Of course, they also bring their insights. This input gives the Fed a better idea of what the big picture looks like. From there, the FOMC discusses target interest rates and monetary policy in the current economic environment to keep the national economy strong and, in turn, most individual regions strong.

In the Southeast, the Atlanta Fed represents the Sixth Federal Reserve District. Like other Federal Reserve Banks, we keep an eye on depository institutions, or banks, through our supervision and regulation team. And we collect expert observations about what's going on in our local economies.

So how does our Atlanta Fed get a feel for what's going on in our neck of the woods? Just looking at numbers and statistics alone won't work because most numbers only look backwards at what happened in the past, and forecasts have their limits. The Atlanta Fed collects expert opinions and economic information from all over our region from people who know what's going on, on the ground. That gives them a forward view, what's happening now.

For example, we might learn that in southern Alabama, an overseas company is building a new passenger airplane assembly plant that will eventually employ 2,500 people. That's a sign that there will be good economic growth in this area. But on the coast of Mississippi, our contacts tell us that a fish processing plant is closing, meaning that 200 people will probably lose their jobs—not a good thing for the local economy.

Who collects this critical economic information? As we said, our boards of directors provide much of the information. They have members coming from all parts of the economy: bankers, manufacturers, labor representatives, and people from the hospitality industry, to name a few. These people keep an eye on their own industries and then tell us what's driving their regional economies.

Also, at the Atlanta Fed, we have a program called REIN, or Regional Economic Information Network. Through this initiative, we maintain relationships with both business people and universities around the region. REIN extends our contacts beyond directors to other businesses, large and small. Also, REIN looks at economic studies from regional scholars and academic institutions and shares the information with the Atlanta Fed's president. REIN also helps to substantiate the anecdotal information we receive from our contacts. Remember the fish processing plant in Mississippi? REIN contacts may let us know that the plans changed and only 100 people will lose their jobs. That makes a difference in the economic impact on the region.

When it comes to understanding our region's economy, getting the whole story is vital. The Atlanta Fed understands this region because we live here. We work here. We've been here a long time and are stakeholders in the health of both our regional and national economies.

Ultimately, the Atlanta Fed keeps its fingers on this region's economic pulse. So the work of our economists and our grassroots information can be combined into a robust regional picture that we take to the FOMC in Washington to inform the Fed's policymaking decisions.

If you would like to learn more about the Fed's regional Reserve Banks, as well as the idea of a decentralized central bank, visit us at www.frbatlanta.org.