speeches · March 29, 2006

Speech

William Poole · President

The Role of Federal Reserve Banks in the Federal Reserve System AnnualGlobalStudentInvestmentForum—R.I.S.E.VI “RedefiningInvestmentStrategyEducation” UniversityofDayton Dayton,Ohio March30,2006 I’m very pleased to be with you today to RESPONSIBILITIES AND discuss the role of the Federal Reserve GOVERNANCE OF THE FEDERAL banks in the Federal Reserve System. The RESERVE SYSTEM Federal Reserve Banks are evolving, along with the rest of the financial system. As with Monetarypolicyisthemostvisibleofthe other financial institutions, evolution is driven Fed’sresponsibilities.Asthenation’scentral by major developments in technology, globaliza- bank,theFederalReserveregulatesthecreation tion, terrorism risks and legislation. ofmoneyandofliquiditymoregenerally.The I’lldiscusssomeofthedetailsoffinancial FederalOpenMarketCommittee(FOMC)isthe evolution,butwillfirsttakeupatopicthatis Fed’smonetary-policybody;itconsistsofthe rarelydiscussed,andoneIfeelpassionateabout. sevenmembersoftheBoardofGovernorsand TheFederalReserveSystemhasamixedpublic- the12ReserveBankpresidents,fiveofwhom privatestructure.However,themostimportant arevotingmembersatanygiventime. oftheFed’sresponsibilitieshavetobemanaged TheFedimplementsitsmonetarypolicyby fromapublic-interestperspectiveandnotfroma settingatargetfederalfundsinterestrate.The profit-makingperspective.AlthoughtheFedhas primarygoalofpolicyistomaintainaninflation publicresponsibilities,thatdoesnotmeanthat ratethatislowandstable—pricestability.Price Fedoperationsallhavetobemanagedandcon- stabilityinturncreatesaneconomicenvironment ductedfromWashington.Indeed,I’llbemaking thatfostersmaximumsustainableeconomic theargumentthattheFed’smixedpublic-private growthandsustainedhighemployment.Inan governancestructurehasbeenhighlyeffective environmentofpricestability,theFedcanrespond inservingthepublicinterestpreciselybecause flexiblytoeconomicdisturbances—anexcellent noteverythingisrunbyafederalagency.The12 exampleis9/11—thatmightotherwiseleadto regionalReserveBanksplayakeyroleinthe recession.Notallrecessionscanbeavoided,but FederalReserveandhavealottodowiththe pricestabilitydoesseemtohavecontributedtoa System’sfinerecordofperformance. Beforeproceeding,Iwanttoemphasizethat morestableeconomyoverthepastdecadeorso. theviewsIexpressherearemineanddonot TheFed’ssecondimportantresponsibilityis necessarilyreflectofficialpositionsoftheFederal toregulateandsupervisevariouskindsoffinan- ReserveSystem.Ithankmycolleaguesatthe cialinstitutions.Theseincludestate-chartered FederalReserveBankofSt.Louisfortheircom- banksthathavechosentobecomeFedmember ments.AlanJ.Stamborskiprovidedspecial banks,allbank-holdingcompaniesandallinter- assistance.However,Iretainfullresponsibility nationalbanksthatoperateintheUnitedStates. forerrors. TheFed’smissioninthisregardistoensurea 1 FEDERALRESERVE safeandsound,aswellascompetitive,banking bythe12quasi-privateReserveBanksfrom systeminthiscountry. incomeontheportfolioofgovernmentsecurities Athirdimportantresponsibilityisprovision usedtoconductmarkettransactions.Therefore, offinancialservicestodepositoryinstitutions theFed’sbudgetisn’tdirectlycontrolledbythe andthefederalgovernment.TheFedistheBank legislativearmofgovernment. forbankers.TheFedcirculatescurrency,clears WhiletheBoardofGovernorsisafederal checksandprovidesseveralformsofelectronic agency,eachReserveBankisacorporation,with payment.TheFedlendsfundstobanksthrough achartergrantedbythefederalgovernmentunder itsdiscountwindow.Thisworkisn’tordinarily theFederalReserveAct.EachReserveBankhas thestuffofheadlinesexceptindramaticcases itsownboardofdirectorsanditsownstock- suchasthe9/11terroristattacks,whentheFed holders,whoarethememberbanks.Aftercover- nippedinthebudthepotentialforaliquidity ingexpensesandastatutory6percentdividend crisis.TheFedlenthugesumstobanksfinancially paidtothememberbanksonthecapitalthey stressedbythebreakdowninthepaymentssys- provide,theFederalReserveBanksreturntheir temandclosureofnormalmarkettrading.No profitstotheU.S.government. purelyprivatefirmwouldhavetheresourcesto ReserveBankdirectorsareleadingcitizens provideemergencyassistanceonsuchagrand activeintheBank’sFederalReservedistrict. scale.TheFed’sresponseto9/11providesan Eachboardhasninemembers,sixelectedbythe excellentexampleofhowweworkwiththepri- memberbanksinthedistrictandthreeappointed vatesectortoprotectthenormalfunctioningof bytheBoardofGovernors.ReserveBankpresi- privatemarkets. dentsareappointedbytheboardsofdirectors AstheBanktotheU.S.government,theFed withtheapprovaloftheBoardofGovernors.All processesgovernmentchecks,moneyordersand directorsandofficersareexplicitlynonpolitical— savingsbonds,andcollectsasignificantportion theycannotholdelectiveofficeorparticipate offederaltaxdeposits.TheFedprovidessoftware activelyinpartisanpoliticalcampaignsas,for andotherservicesthatpermittheTreasuryto example,campaignmanagersorfundraisersfor manageitsfundsefficiently. candidates.Thus,thetopleadershipofthe Asthisoverviewindicates,theFederal ReserveBanksisremovedfrompolitics,further ReserveBanks,withoversightbytheFederal contributingtotheFed’sindependence. ReserveBoardofGovernorsinWashington,have TheFederalReserveBanks,then,arethe amixofpublicandprivateresponsibilities. quasi-privatepartoftheFederalReserveSystem. Monetarypolicyandbankregulationareclearly TheBanksdrawonprivatesectorknowledge publicresponsibilities.Financialservicestothe andexpertiseinpursuingtheFed’smission.The banksandtheTreasuryhavemixedpublic-private structureoftheboardsandoversightfromthe aspects,particularlygiventhatanumberofpurely BoardofGovernorsensurethatprivatesector privatefirmscompetewiththeFed. representationwillservepublicpurposes.The AtthecenteroftheFederalReserveSystem Systemispoliticallyaccountablebutseparated istheBoardofGovernors.MembersoftheBoard fromday-to-daypoliticalpressures.Thisstruc- areappointedbythePresidentoftheUnited tureservespublicpurposesmoreefficientlyand StateswiththeadviceandconsentoftheSenate effectivelythanwouldapurelyfederalagency. fortermsofofficeof14years.TheBoardishead- Thatprivate-sectorinfluenceisalsoimportant quarteredinWashington,isafederalagencyand intheFed’sanalysisoftheeconomyandmone- isclearlypoliticallyaccountable.However,the tarypolicymaking.EachFederalReserveDistrict structureoftheSystemisdesignedtokeepthe notonlyservesthepeoplewithinitsgeographi- Fedindependentofpartisanpolitics.TheBoard calbordersbutalsobringsregionalperspectives ofGovernorsisnotfundedbyannualappropria- andinformationtobearonnationalissues.Itis tionsfromCongress;rather,theBoardisfunded importanttodistinguishregionalperspectives 2 TheRoleofFederalReserveBanksintheFederalReserveSystem fromregionalinterests.Today,theFed’sregional pleinthefederalgovernment.Youdon’toften structuredoesnotserveregionalinterestsperse hearsuchcommentstoday,andwithgoodreason. butinsteadbringsinformationandregionalper- AsI’veemphasized,theFederalReserveSystem spectivestobearonnationalresponsibilities. wassetuptobeindependentofday-to-daypres- BecausetheUnitedStatesisafullyintegrated suresfromthefederalgovernment,buttobe nationaleconomy,monetarypolicydecisions clearlyaccountabletoCongress.Thegovernance affecttheentirecountryandthereisnopossibility structureoftheFederalReserve,designedtokeep ofconductingseparateregionalmonetarypolicies. theFedoutofpolitics,hasbeensuccessfulin IbelievethatitiscriticaltotheFed’ssuccess doingsoandhascontributedimportantlyto thatmonetarypolicydecisionsareaconsensus soundmonetarypolicy. outcomereflectingviewsfromWashington—the Governors—andfromaroundthecountry—the ReserveBankpresidents. FINANCIAL EVOLUTION TheFedSystemopeneditsdoorsin1914,or Withrapidchangeinthenation’sandworld’s 125yearsaftertheU.S.Constitutionbecamethe lawoftheland.Youmightthinkthateverycoun- financialsystem,theFederalReservehashadto trywouldhaveacentralbankfromdayone,and change,too.TheFed’spublic-privatestructure CongressdidchartertheFirstBankoftheUnited hashelpedtheinstitutiontoadaptandchange Statesin1791.Butbankingwasacontroversial successfully. subjectintheearlydays;ThomasJefferson,for Herearejustthreeamongmanychangesin example,arguedagainstcharteringthebank,say- theFederalReserveSystemthatyoumightnot ingtheConstitutiondidnotempowerCongress beawareof: tocreateacentralbank. • TheReserveBanksarebecominganetwork CongressrefusedtorenewTheFirstBank’s ofspecialists,justasmanyothersincor- charterafter20yearsbecauseofthepublicoutcry porateAmericaaredoing.Inthedaysbefore overitsconcentrationofmoneyandpower.But computersandinterstatebanking,eachof theneedforacentralbankdidnotdisappear, the12FederalReserveBanksaroundthe andafewyearslaterCongresscharteredthe countryprovidedalmostallservicesand SecondBankoftheUnitedStates.Itwaseven productstothecommercialbanksinits largerthanthefirstand,hence,morepowerful. district.Whilesomeproductsweresimilar, Again,therewasoppositionfromsomewell- manyservicesandtheirpricesvariedby knownleaders,includingPresidentAndrew district.Withtoday’snationwideandlarge Jackson.HisattacksontheBank’spowerstruck regionalbanks,differencesinFedservices apopularchordwithfarmers,smallbusinesses, andprocedurescauseproblemsforthe smallbanksandmanypoliticians;allofthem manycommercialbanksthatoperateacross perceivedtheBanktobeagiantobstacleintheir FederalReserveDistrictboundaries.Thus, pathtosuccess.TheBankwasshutdownwhen ReserveBankshavelargelystandardized itscharterexpiredin1836.Between1836and 1914,whentheFederalReservebeganitsopera- theirofferings.Atthesametime,Reserve tions,theUnitedStatesstruggledwithanunsat- Banksarecarvingoutspecialtiessothat, isfactorybankingsystemlackingincentral together,theycangainefficiencies.Certain authorityanddirection. ReserveBanksareresponsiblefordevelop- AnimportantdifferencebetweentheFederal inganddeliveringparticularproductsand ReservetodayandtheFirstandSecondBanks services.Othersaremarketingthem.Oneof wastheperceivedpoliticallinksoftheearlier theSt.LouisFed’sspecialties,forexample, Banks.Inthemindsofmany,theearlyBanks istodevelopnewsoftwareapplications wereseenasapoliticalarmofthepowerfulpeo- fortheU.S.Treasury,whichisincreasing 3 FEDERALRESERVE itsuseofelectronicreceiptsandpayments Now,let’smoveontosomeofthemorespe- toreducecostsandimproveservices. cificchangesthatareoccurringintheFed’sthree • TheFediscuttingbymorethanhalfthe mainareasofwork. numberofReserveBanksitesaroundthe Insupervisionandregulation,technologyis countrythatprocesschecks.TheFedis changingthepracticeofbankexamination.The contractingitspaper-processingfacilities Fedusedtorelyonexamineron-sitevisitsto becausepeoplearewritingfewerchecks bankstomakesurethatloanswereproperly infavorofusingcreditcards,debitcards documented,thatbankshadlinedupenough andotherformsofelectronicpayment. soundcollateralbeforeissuingloans,thatthere Check-processinghasbeenahugebusi- wasnored-lininggoingon,andsoforth.Today, nessfortheFed,whichhastraditionally examinersstillmakethosevisits,butmuchof processedaboutone-thirdofallchecks themonitoringofthebooksishandledoff-site, writteninthiscountry.TheFedhasbeen thankstocomputerizedinformationsystems.And encouragingthistransitionbecausean theexaminersaremuchmoreforward-looking. electronicpaymentssystemischeaper, Theygobeyondtherecord-keepingofcurrent morereliableandmoresecurethanapaper- andpastperformancetolookforproblemsthat basedone.Allofthesebenefitsareimpor- mightbeonthehorizonsothattheycanbeheaded tanttotheFedbecauseasafeandefficient off.Examinersarelookingaheadbyfocusingon paymentssystemisoneoftheFed’skey riskmanagement—suchthingsasinternalrisk responsibilities. controlsandportfolioconcentrations. Addingtothechallengeistheever-increasing • Athirdmajorchangeinvolvestheincreas- sizeandsophisticationofmajorbankstoday. inglyopenandpublicwaytheFedcon- Thelargestbanksnowhaverevenuethatdwarfs ductsmonetarypolicy.TheFOMCisnot theGDPofsomecountries. thesecretivegroupitoncewas.Notuntil Obviously,beingabankexaminerismore 1994didtheFOMCreleaseapressstate- challengingtodaythanitwaseven10or20years mentfollowingapolicyaction.Themarkets ago.Asbankingbecomesincreasinglycompli- employedasmallarmyofFedwatchersto cated,bankexaminersmustkeepupthrough determinewhethertheFed’sopenmarket extensivetrainingandspecialization.Already, operationsindicatedachangeinthecom- Fedexaminersincreasinglyspecializeinpartic- mittee’spolicystance.Today,theFOMCis ularaspectsofoverseeinglarge,complexbanking quiteopenwithitsactions.Policydeci- organizations. sionsareannouncedshortlyaftertheyare made,atastandard2:15p.m.Easterntime Moreover,becausetherearethreeprimary aftertheFOMCmeetingconcludes.Atthat federalbankingregulators—besidestheFed,the time,thecommitteealsoissuesapolicy OfficeoftheComptrolleroftheCurrencyand statementthatoutlinestherationaleforthe theFederalDepositInsuranceCorporation—the policydecision.Fedofficialsspeaktothe Fedneedstoworkcooperativelywithotheragen- generalpublicandtestifybeforeCongress cies.Someregulatoryissuesalsoinvolvethe oftenaboutthereasonsforpolicydecisions OfficeofThriftSupervision,theSecuritiesand inanefforttohelppeopleunderstandthe ExchangeCommissionandtheCommodities roleoftheFedandwhyitdoeswhatitdoes. FuturesTradingCommission.TheFedalsocoor- Asaresultofthistransparency,themarkets dinatesitsbankexaminationswithstatebanking aremoreinsynchwithFOMCdecisions; commissions.Clearly,thetaskofbankingsuper- thebestevidenceofthisfactistheenor- visionandregulationinvolvesmultiplelevelsof mousdeclineinmarketvolatilitywhen complexity.TheReserveBanks’regionalpresence FOMCpolicydecisionsbecomeknown andextensivecontactswithstateregulatorsand comparedtotheearlierera. theprivatesector,includingthebankingindustry, 4 TheRoleofFederalReserveBanksintheFederalReserveSystem strengthensupervisionbyencouragingcommu- Fedinnovationhasstrengthenedmonetary nicationthatmightnototherwiseexist. policydecisionmaking.TheFed’slargestaffof Similarly,dramaticchangesaretakingplace professionaleconomistsattheBoardofGovernors inanotherareaofFedresponsibility—financial andtheReserveBankshasmadeimportantstrides servicestobanks.TheFeddoesstillflyandtruck ineconomicmodelingandpolicyanalysis. boxesofchecksalloverthecountrytosettle Anotheraspectofpolicypracticetodayisthat accounts.ButtheFedisalsoencouragingbanks theFedgathersmuchinformationbeyondthe totransportdigitalimagesofchecksalongfiber standardstatisticalreleases,whichreportsuch opticnetworks.Thisinnovationwasmadepos- importantdataasmonthlyemploymentand siblebytheCheckClearingforthe21stCentury unemployment.Onepartofthisprocessisquite Act,betterknownasCheck21.Congressenacted formal,andityieldstheBeigeBook,published thislegislationin2003withthesupportofthe shortlybeforeeveryFOMCmeeting.TheBeige Fed.ThenewtechnologypermittedbyCheck21 Bookisacollectionofanecdotalinformation speedsupfundssettlementswhilereducingpro- gatheredbyFedeconomistsineachdistrictover cessingcostsandboostingsecurity. theweekspriortoanFOMCmeeting.Economists TheFedisalsokeepingtabsonotherdevel- callalonglistofcompaniestoaskaboutwhatis opmentsinelectronicformsofpayment,suchas happeningintheirmarketsandhowtheirmarkets smartcardsanddebitcards.TheFedhashelped mightchangeinthenearfuture.Thesenuggets pioneersomeelectronicpaymentssystemsitself, ofinformationaresummarizedandmadeavail- suchastheautomatedclearinghouse.Butthe abletobothFOMCmembersandthegeneral Fed’smainroleinthisregardshouldbeoversee- public.Confidentialinformationfromindividual ingstandardsforthesenewproductstoensure firmsisnotdisclosed;thispracticeassuresBeige thatthepaymentssystemisreliableandaccessi- Bookcontactsthattheycanspeakcandidly. bletoall. I,alongwithotherReserveBankpresidents, Anotherchangeinfinancialservicesinvolves alsomakecallstobusinessleadersshortlybefore usingsubcontractorsinthehandlingofcurrency. everyFOMCmeeting.TheSt.LouisFedand WhentheSt.LouisFedshutdownitscheck- otherFedBankshavemeetingswithdiverse processingoperationsinLittleRockand groupsthroughouttheyeartoaddtothestoreof Louisville,theBankdecidedthatitnolonger insights. madesensetoprovidecurrencyservicestheold Becauseanecdotalinformationcanbeso way.Itwasn’teconomicaltomaintainlargebuild- helpful,theFedisputtingmoreeffortintogath- ingsandstaffprimarilyforstoringandcirculating eringit.AttheSt.LouisFed,we’vecreatedwhat currencyforlocalcommercialbanks.Thesolu- wecallourBranchingOutinitiative.Wehave tionwastooutsourcethisservicethroughcash transformedourBranchesfrompurelyoperating depotssetupbyarmoredcarriers.Thisarrange- unitstothemuchbroaderroleofprovidinga ment,thoughpainfulforouremployeeswhohave losttheirjobs,hasservedourcustomerswell morevisibleintellectualpresenceinourbranch andiscreatingsubstantialsavingsfortaxpayers. cities.Weaddedcommunityaffairsstaffand And,I’mproudtosay,otherReserveBanksare economiceducationstafftoeachBranchtoboost followingtheSt.LouisFedmodelinestablishing publicunderstandingofmonetarypolicyandof cashdepots. theeconomyingeneral.Weworkwithhigh Monetarypolicyisanotherareaofinnova- schoolsoneconomiceducationandmanygroups tion.Almostallpresscoverageofmonetarypolicy inourcommunitiesonfinancialliteracysothat focusesonthemostrecentpolicydecisionand peoplewillbebetterabletohandletheirfinancial speculationaboutfuturepolicydecisions.Such affairswithout,forexample,fallingpreytopreda- discussionhasbeenastapleofpresscoverage torylenders.Wesendoureconomistsaroundthe fordecades. EighthDistricttomakepublicpresentations,and 5 FEDERALRESERVE weoffermoreprogramsaboutmoretopicsfor morepeoplethaneverbefore. Oureffortstemsfromourrecognitionthat weneedastrongbaseoflocalinformationand localunderstandingoftheeconomy.Weneed localinsightintowho’shiring,who’sfiring,who’s investinginnewequipmentandbuildings, whetherhomesalesaregoingupordown, whetherlocalbusinessesareexpandingand muchmore.Iusethisinformationinthinking aboutmyroleasamemberoftheFOMC. AsfortheFOMCmeetingsthemselves,the mystiquecreatedbythemediaisatadoverblown. Theresponsibilityisgreat,thesurroundingsare intimidating—wemeetina56-foot-longboard- roomwithahalf-tonchandelierhangingover ourheads.Thebrainpowerassembledinthe roomisimpressive.But,otherthanthereal-time anecdotalinformationwe’vecollected,wehave verylittleinformationthatanyoneelsecouldn’t gather.Ifyoureadtheminutesofthemeetings, andespeciallyifyoureadtheverbatimmeeting transcriptthatisreleasedwithafive-yearlag,you willseewearen’tallonthesamepageallthe time.Wedebate.Wediscussthedata.Welisten tooneanother’sanecdotesabouthowtheecon- omyisdoing.Weevenchuckleoveramusing quips.Then,afterreviewingexpertstaffanalysis andalltheinformationandwisdomwecan muster,wereachaconsensusmonetarypolicy decision.TheFedchairman,ofcourse,leadsthe discussionanddefinestheconsensus,butwhen anyofusbelievessufficientlystronglythat anotherpolicycoursewouldbebetter,weenter adissent.AndwhentheFOMCmeetingisover, weadjournandhavealunchofsoup,coldcuts andsalads,justasweareabouttodotoday. But,beforeweeat,I’dbedelightedtotakea fewquestions.Iwillaskyou,however,tocon- fineyourquestionstothesubjectmatterofthe speech.TheFOMChasalong-standingpractice ofnotdiscussingmonetarypolicyandrelated issuestheweekbeforeandtheweekofanFOMC meeting.So,whileafteraspeechIordinarily takequestionsonanyandallsubjects,todayis differentbecausewehadanFOMCmeetingonly twodaysago. 6

Cite this document

APA

William Poole (2006, March 29). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20060330_poole

BibTeX

@misc{wtfs_speech_20060330_poole,
  author = {William Poole},
  title = {Speech},
  year = {2006},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20060330_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}