The Federal Reserve System
...world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men." The Federal Reserve System is an independent central bank. Although the President of the United States appoints the chairman of the Fed and this appointment is approved by the United States Senate, the decisions of the Fed do not have to be ratified by the President or anyone else in the executive branch of the United States government. According to the United States Constitution, the U.S. Congress has the power and responsibility to coin money and set its value. In the 1913 Federal Reserve Act, Congress delegated this power to the Federal Reserve. The constitutionality of this type of action has been controversial many times in the United States, most notably in the early 19th century when Congress chartered the Bank of the United States. Although the constitutionality of the Federal Reserve system has not been a topic of recent judicial or legislative controversy, it has been the target of some who strongly distrust the delegation of power to an unelected and unaccountable body. The Federal Reserve System consists of 12 Federal Reserve Banks: Boston, Massachusetts; New York, New York; Philadelphia, Pennsylvania; Cleveland, Ohio; Richmond, Virginia; Atlanta, Georgia; Chicago, Illinois; Saint Louis, Missouri; Minneapolis, Minnesota; Kansas City, Missouri; Dallas, Texas and San Francisco, California. All banks chartered under the National Banking Act of 1863 were made members of the Federal Reserve System, while others could join. A Board of Governors appointed by the President of the United States and confirmed by the Senate. Members are elected to terms of 14 years, with the ability to serve for no more than one term. A governor may serve the remainder of another governor's term in addition to their own full term. The Federal Open Market Committee (FOMC) comprises the 7 members of the board of governors and 5 representatives selected from the Federal Reserve Banks. The representative from the 2nd District, New York, is a permanent member, while the rest of the banks rotate on two and three year intervals. The current members of the Board of Governors are: Alan Greenspan, Chairman; Roger W. Ferguson, Jr., Vice-Chairman; Edward M. Gramlich; Susan Schmidt Bies; Mark W. Olson; Ben S. Bernanke and Donald L. Kohn. The Fed implements monetary policy largely by steering the federal funds rate, also called the overnight rate, using open market operations. This is the interest rate that banks charge each other for overnight loans to each other. This in turn influences the prime rate which is usually about 3 percentage points higher than the federal funds rate. This prime rate is the rate that most banks price their loans at for their best customers. Lower interest rates stimulate economic activity by lowering the cost of borrowing, making it easier for consumers and businesses to buy and build. Higher interest rates ovbiously slow the economy by increasing the cost of borrowing. The Fed usually adjusts the federal funds rate by 0.25 or 0.50 percentage points at a time. From early 2001 to mid 2003 the Fed lowered its interest rates 13 times, from 6.25 to 1.00 percent, to fight recession. In November 2002, rates were cut to 1.75, and many interest rates went below the inflation rate. On June 25, 2003, the federal funds rate was lowered to 1.00 percent, its lowest nominal rate since July, 1958, when the overnight rate averaged 0.68 percent. Starting at the end of June, 2004, the Fed started to raise the target interest rate in response to concerns about the potential for increased inflation from a too-active economy. The Federal Reserve claims that nobody owns it and that it is an “independent entity within the government.” The Federal Reserve is subject to laws such as the Freedom of Information Act and the Privacy Act which cover Federal agencies but not private corporations, but Congress gave the Federal Reserve the autonomy to carry out its responsibilities insulated from political pressure. Each of the Fed's three parts – the Board of Governors, the regional Res...