Economia

SYSTEM
PUBLICATION

The Federal Reserve System

PURPOSES
FUNCTIONS

&

The Federal Reserve System


PURPOSES
FUNCTIONS

&

Board of Governors of the Federal Reserve System

Washington, D.C.


i

The Federal Reserve System: Purposes and Functions

First Edition, May 1939
Second Edition, November 1947
Third Edition, April 1954
Fourth Edition, February 1961
FifthEdition, December 1963
Sixth Edition, September 1974
Seventh Edition, December 1984
Eighth Edition, December 1994
Ninth Edition, June 2005
Library of Congress Control Number 39026719

Copies of this book may be obtained from Publications
Fulfillment, Board of Governors of the Federal Reserve System,
Washington, DC 20551.

Publications Committee
Lynn S. Fox, Chair, Scott G. Alvarez,Sandra Braunstein,
Marianne M. Emerson, Jennifer J. Johnson, Karen H. Johnson,
Stephen R. Malphrus, Vincent R. Reinhart, Louise L. Roseman,
Richard Spillenkothen, and David J. Stockton

Purposes and Functions is published under the direction of the
staff Publications Committee. It is assisted by the Publications
Department, under the direction of Lucretia M. Boyer.

ii

Preface

This is the ninth edition of The Federal Reserve System:
Purposes and Functions. It has been revised by staff
members of the Federal Reserve Board to reflect the changes
that have taken place in the monetary, regulatory, and other
policy areas since publication of the eighth edition in 1994. It
incorporates major changes in the law and in the structure of
the financial system that haveoccurred over the past decade.
The Board’s Publications Committee had overall responsibility for the preparation of this edition. Major contributions were made by the following:
Division of Research and Statistics
Thomas D. Simpson
Division of Monetary Affairs
Cheryl L. Edwards, William R. Nelson, Seth B. Carpenter, and
Selva Dem iralp
Division of International Finance
Joseph E. GagnonDivision of Banking Supervision and Regulation
R ichard Spillenkothen, Virginia M. Gibbs, and Greg Feldberg
Division of Consumer and Community Affairs
Jeanne Hogarth, Adrienne Hurt, Terri Johnsen, Elizabeth Eurgubian,
Yvonne Cooper, and Tracy Anderson
Division of Reserve Bank Operations and Payment Systems
Jeffrey C. Marquardt and Theresa A. Trimble
Legal Division
K ieran Fallon, JoshuaH. Kaplan, Amanda Allexon, and Heatherun Allison
Office of Board Members
Rose Pianalto, Diana Lahm, Anita Bennett, and Britt Leckman

iii

The Federal Reserve System: Purposes and Functions




Contents

1 Overview of the Federal Reserve System ..........................
Background .............................................................................
Structure of theSystem .........................................................
Board of Governors .................................................................
Federal Reserve Banks ............................................................
Federal Open Market Committee ...........................................
Member Banks ........................................................................Advisory Committees ..............................................................

1

1

3

4

6

11

12

13


2 Monetary Policy and the Economy .....................................
Goals of Monetary Policy ......................................................
How Monetary Policy Affects the Economy ......................
Limitations of Monetary Policy............................................
Guides to Monetary Policy ....................................................
Monetary Aggregates ..............................................................
Interest Rates ..........................................................................
The Taylor Rule ......................................................................
Foreign Exchange Rates...