Monetary policy starts in your own backyard

The actions taken by the Federal Reserve to influence the availability and cost of money and credit as a means of promoting the national economic goals of price stability, full employment, and sustainable economic growth are collectively known as monetary policy. To assist in the formulation of monetary policy, the Federal Reserve relies heavily on intelligence-gathering sources. One such source is the "grassroots" economic intelligence gathered from the boards of directors of the 12 Reserve Banks and their branches.

Reserve Bank boards represent diverse interests
Under the Federal Reserve Act, each of the 12 Reserve Banks is separately incorporated with its own board of directors. Each Reserve Bank head office has a nine-member board, and each of the branches has a board of from five to seven members. The directors represent the interests of various sectors of the economy such as agriculture, manufacturing, and services. Head office directors' responsibilities are broad, ranging from operational oversight, including budget, expense, and internal audits of the Reserve Bank to making recommendations on monetary policy and appointing Reserve Bank presidents and first vice presidents.

In addition, the boards of directors provide the Federal Reserve System with a wealth of information on economic conditions from virtually every corner of the country. This information is used by the Federal Open Market Committee (FOMC) and the Board of Governors in formulating monetary policy decisions. Thus, regional participation and guidance help steer the Fed's policy direction.

Targeted queries addressed
Prior to each monthly board meeting, directors are asked to gather economic intelligence, in the form of a report, in response to specific questions developed by the Reserve Bank's research economists. Questions may include directors' perspectives on the latest economic or business trends, prices, labor, or inventories, for example. Their responses are discussed and debated at the board meeting, concluding with each member voting on the discount rate—whether to raise, lower, or keep the rate the same. The president of the Bank hears all the economic reports, which he uses to aid him in developing his opinion on monetary policy.

Ultimately, this information influences what happens both at the district and national levels as the 12 Reserve Bank presidents attend the FOMC meetings to set monetary policy and decide on the fed funds rate target. The "grassroots" economic intelligence provided by directors has significant influence on the Fed's policy direction, adding value in terms of "real world" input. In short, monetary policy starts in your own back yard.

Lesson Components

By Julie Kornegay, economic and financial education representative, Birmingham Branch, and Sarah Arteaga, economic and financial education representative, Jacksonville Branch
Spring, 2006