The Federal Reserve System controls the flow of money and credit in the U.S. economy. But most Americans know little about the institution that has the greatest impact on their pocketbooks. Indeed, during a Senate Banking Committee meeting earlier this year, Chairman Phil Gramm, R-Texas, told Alan Greenspan, “Millions of people . . . don't know that there is a Federal Reserve bank, much less that you're chairman of it.”
As the nation's central bank, the Fed sets monetary policy to maintain economic stability and keep inflation in check. Congress added to its list of duties in 1978, mandating that the Fed try to create economic conditions that will lead to full employment.
The Fed consists of 12 regional Reserve banks, which serve as the Fed's operating arms, regulating the flow of coin and currency and making loans to other banks. The Federal Reserve System is run by a Board of Governors that supervises the 12 regional banks. Appointed by the president, the seven board members serve 14-year terms. From this group, the president appoints a chairman and vice chairman to four-year, renewable terms.
The Fed's greatest responsibility is to set a benchmark for the “federal funds rate” -- the interest rate at which banks lend money to each other. That target rate is set by the 12-member Federal Open Market Committee, which generally meets eight times a year.
The committee is comprised of all seven members of the Board of Governors and five of the 12 regional bank presidents. Its decisions to raise or lower interest rates can send the stock market soaring or plummeting. Financial analysts spend the weeks before each scheduled meeting trying to predict what the committee will do.
The committee meets in private but releases a summary of its deliberations. But it didn't start announcing its interest-rate decisions until 1994, when pressure from Congress forced it to be more open.
“These meetings should be held in public because these are very important decisions these people are taking, and we should be able to see what they're doing and why,” says Dean Baker, co-director of the Center for Economic and Policy Research.
But authors David B. Sicilia and Jeffrey L. Cruikshank argue in their recent book, The Greenspan Effect, “If investors were privy to the central bank's policy deliberations in real time . . . the financial markets would be in a continual state of turmoil. . . . This would not be the stuff of stability, which, after all, the Fed was invented to promote.” (continued below)
Beckner, Steven K. , Back from the Brink: The Greenspan Years, John Wiley and Sons, 1996. Beckner, a broadcast journalist, offers a detailed account of Fed Chairman Alan Greenspan's first decade in office. Beckner's examination of Greenspan's reaction to the 1987 stock market crash is particularly enlightening.
Greider, William , Secrets of the Temple: How the Federal Reserve Runs the Country, Touchstone Books, 1987. Greider, a writer for Rolling Stone, chronicles the Federal Reserve's history, focusing on the institution's years under Chairman Paul Volcker. Greider is very critical of Volcker's tough inflation-fighting policies.
Lindsey, Lawrence B. , Economic Puppetmasters: Lessons from the Halls of Power, AEI Press, 1999. Lindsey, who served on the Federal Reserve's Board of Governors, gives a good overview of what Greenspan and other central bankers think about the conduct of monetary policy.
Jeffrey L. Cruikshank , The Greenspan Effect: Words that Move the World's Markets, McGraw-Hill, 2000. Sicilia and Cruikshank, both business consultants, explore Chairman Greenspan's thoughts on everything from inflation to Social Security.
“Almighty Alan Greenspan,” The Economist, Jan. 8, 2000. The article urges U.S. policy-makers to make the Fed less reliant on Greenspan's credibility by giving it clearer goals and requiring greater transparency.
Greenwald, John , “Who's Raising Your Rates? The Federal Open Market Committee, That's Who,” Time, May 29, 2000. Greenwald explores the workings of the Federal Open Market Committee, which he describes as “the second most powerful group of appointees in Washington -- behind only the Supreme Court.”
Ignatius, David , “Alan Sunshine,” The Washington Post, May 19, 1999. Ignatius, a columnist for The Washington Post, applauds recent moves at the Fed toward greater openness.
Miller, Rich , “Greenspan's Dilemma: The More Confident Investors Are In Him, the Harder His Job Becomes,” Business Week, April 3, 2000.