Regional Update (January-March 1996)

Index The state of the states Southeastern manufacturing survey Southeastern economic indicators

Cover Story - New President to Guide Atlanta Fed Through Era of Change

Federal Reserve System Serves Three-Tiered Mission

Atlanta Fed to Build New Headquarters

Federal Reserve System
Serves Three-Tiered Mission

magine driving to your ATM only to discover that it's broken and you can't get any money. (It's 1996; slightly annoyed, you'll drive to another ATM.)

Now imagine that it's Saturday afternoon and you just missed the tellers at the drive-through and the bank won't open until Monday. (It's 1970; very annoyed, you'll borrow $20 from your best friend and use credit cards when you can.)

Now try to imagine that you go to your bank and the manager tells you there is no more money in the vault because all the customers have withdrawn their funds and the bank will have to close. Possibly permanently. (It's 1907; you panic, your friends panic, the banks panic, the government comes up with a plan to try to prevent this from ever happening again.)

The Panic of 1907, as that particularly severe banking crisis is known, prompted Congress to create a commission to develop a blueprint for a central bank. The result, after much debate among lawmakers, was the Federal Reserve Act, which President Woodrow Wilson signed into law on Dec. 23, 1913.

The law created the Federal Reserve System, which consists of a central government agency—the Board of Governors in Washington, D.C.—and 12 regional Federal Reserve Banks, including the Atlanta Fed.

The Fed's Mission

The purpose of the Federal Reserve System originally focused on lending banks money to ensure that they would have sufficient cash in times of seasonal shortages and incipient panics as well as to provide currency to the banking system. The Fed also was to supervise state-chartered banks to maintain their stability and compliance with the federal banking laws. But, as the financial industry and the economy evolved and developed, the scope of the Federal Reserve's mission also expanded. Today, the Federal Reserve System has three distinct functions: supervising banks, including bank holding companies, many state-chartered banks, and international banks; running huge payments systems that involve processing checks and transferring funds electronically; and monitoring and adjusting monetary policy to guard the economy against high inflation and recession.

In regard to monetary policy, the Federal Reserve's legislatively mandated goals are stable prices and maximum employment.

The Federal Reserve has three main avenues forfine-tuning monetary policy:

  • Open market operations—the buying and selling of U.S. government securities in the open market to influence the level of reserves in depository institutions and short-term interest rates.
  • The discount rate—the interest rate charged to commercial banks when they borrow from a regional Federal Reserve Bank, such as the Atlanta Fed.
  • Reserve requirements—establishing the amount of funds that commercial banks and other depository institutions must hold in reserve against deposits.
Decisions to buy or sell securities are made by the Federal Open Market Committee (FOMC), which consists of the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and presidents of four other Federal Reserve Banks who rotate their service. All of the Fed's regional bank presidents participate in FOMC discussions. Atlanta Fed President Jack Guynn will become a member in 1997.

Recommendations for the discount rate come from the boards of directors of Reserve Banks. These proposals must be ratified by the Board of Governors.

The Board of Governors has sole authority over reserve requirements.

The Reserve Banks' Role

The 12 Federal Reserve Banks gather and analyze information about economic conditions in their regions and contribute that input, along with their perspectives on national economic conditions and monetary policy, to FOMC deliberations.

The regional Banks also serve as the System's operating arm. They provide depository institutions with payments services including check collection, electronic transfers of funds, and distribution and processing of currency and coins.

And finally, the regional Banks act as the federal government's fiscal agents, maintaining the Treasury Department's transaction account, paying Treasury checks, and issuing, transferring, and redeeming U.S. government securities.

The Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District—Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee. The Atlanta Fed has branch offices in Birmingham, Jacksonville, Miami, Nashville, and New Orleans.

The Boards

The creators of the Federal Reserve System must have been able to envision a day when politics would be so contentious that passing a budget would be a seemingly insurmountable challenge. To shield the Federal Reserve System and the nation's monetary policy from the whims of politics, the creators established the central bank with considerable autonomy from the government.

The seven members of the Board of Governors are appointed by the U.S. president and confirmed by the U.S. Senate. But their terms last 14 years so that each new administration cannot overhaul the System with like-minded policymakers. However, a chairman and vice chairman are selected from among the board members every four years. And the Fed chairman reports to Congress twice a year on monetary policy objectives.

Each of the 12 regional banks has a nine-member board of directors, and the directors are chosen from outside the Fed Banks. Three directors represent commercial banks that are Federal Reserve System members. The six other board members represent the public. The commercial banks elect the three board members from the commercial banks and three of the six representing the public. The Board of Governors in Washington, D.C., selects the other three members, and the chairman of the local Fed boards must come from this group.

The Bank boards name a president and vice president of their Bank, although those nominations must be approved by the Board of Governors.

By representing national, regional, and local interests and banking as well as other business interests, the diversity of board members contributes to the Reserve Banks' accountability to the American public despite the Fed's autonomy within the government.

The Budget

Perhaps the area that best illustrates the Federal Reserve System's political independence is its budget.

The System raises its income primarily from the interest on U.S. government securities that it has acquired through open market operations. Its expenditures are not part of the federal budget. Fees from services such as check clearing, funds transfers, and automated clearinghouse operations cover most of the costs of the Fed's extensive financial services operation. Other less significant sources of income are interest that may be earned on foreign currency investments and interest on loans to depository institutions.

After it pays its expenses, the system transfers the rest of its earnings to the Treasury.

The individual Fed Banks must submit their annual budgets to the Board of Governors for approval. And other capital expenditures—such as renovations, new buildings, and salaries for the president and vice president—are subject to approval by the Board of Governors.


In summary, the Federal Reserve System is an important public policy organization that affects businesses and individuals through its influence on short-term interest rates, money and credit availability, and banking supervision. Its independence from the federal government ensures that long-term economic goals are not scuttled by short-term political influences. And its regulatory authority and its role in the payments system ensure that customers can depend on their banks.