Economic Policies of The Federal Reserve

The Federal Reserve System (The Fed) is an integral part of the nation's payment system. TheFederal Reserve System is ruled by a six member board of governors and a Chairman of the Board.The 12 Federal Reserve Banks provide enough coins and notes in circulation for demand of thepublic to be met. In addition the Banks provide banking options for the federal government, providecheck cashing services to banks and other financial institutions, and operate electronic paymentsystems.

The Federal Reserve System is ruled by a six member Board of Governors and a seventh appointedChairman of the Fed. The Chairman of the Fed is actually one of the Board of Governors that isappointed as the Chairman by the President of The United States once every four years. Theappointment by the President is then confirmed by the Senate. The other members of the Board ofGovernors serve 14 year terms. It is possible for a governor to serve more than the 14 years if theyare appointed to finish off another Governor's term and then get appointed to their own term. ThePresidents of the 12 Regional Federal Reserve Banks are appointed by the Regional Bank's Board ofDirectors.

One of the main responsibilities of The Fed is to keep enough coins and currency available to meetpublic demand. When there is a bigger demand for money, such as the holiday season, the Fed willsend an order for notes to the U.S. Bureau of Engraving and Printing in Washington, D.C., and FortWorth, Texas. When ordering additional coin the order is sent to U.S. Mints in Philadelphia andDenver. These notes and coins are then drawn from one of the 12 Federal Reserve Banks by memberbanks against their Federal Reserve account balance. When a member bank has an excess of notesand coins they return the monies to the Federal Reserve Bank so that the balance increases. One ofthe primary jobs of the Fed Res Bank is to take worn out notes out of circulation and replace withnew ones.

The Fed also provides check collection services to member banks. Nearly 1/3 of all paper that isconsidered a check is processed through The Fed. Some member banks have agreements with eachother in place that allow them to clear checks with each other without involving The Fed. As a

general trend, writing of paper checks has been steadily declining since the 1990s. Instead mostconsumers are using electronic payment methods. Since 2004 banks have been taking images ofchecks and having The Fed process those images. This is a practice that The Fed has activelyencouraged and today 99% of all checks are processed as images. There is only one site that remainsin the US that still processes paper checks, located Cleveland, Ohio. This is down from the 45 sitesthat processed paper checks in 2003.

The important thing to remember though is that even though the volume of paper checks has beendeclining for The Fed, the volume of electronic checks has been steadily increasing. For smallerinstitutions The Fed has established an Automated Clearinghouse (ACH) that allows them to cleardebit and credit transactions. The Fed processes 75% of all of the nation's ACH payments, whichinclude mortgage payments, utilities, one time payments over the internet, social security payments,direct deposit payroll payments, etc. For large transactions The Fed maintains the Fedwire thatallows instantaneous transfers of payments from one financial institution to another. These includesecurities that are issued by the Federal Government, government sponsored enterprises, othergovernment agencies, and certain international organizations.

The most important role of The Fed is to act as the main banker for the Federal Government. Theymaintain the Treasury Department's Checking account and clear Treasury Department checks. AllUS Treasury Securities are issued, transferred and redeemed by a Federal Reserve Bank. Auctionsfor US Treasury Securities and processing of US Savings Bonds are done exclusively by a FederalReserve Bank. In addition The Fed is responsible for Government payouts such as Social Securityand payroll checks.

The importance of the Federal Reserve System to the Economy of the United States, and thereby theeconomy of the world, is immeasurable. The main overseeing entity for The Fed is the seven-memberBoard of Governors, one of whom is appointed as the Chairman of the Fed. The Fed is responsiblefor providing enough currency, in the form of coins and notes, to satisfy the demand of the economy.The Fed ensures that all financial institutions can collect on checks and other electronic payments.The Federal Government uses The Fed as its primary banker, especially the issuing and processingof US Treasury Securities.