The Federal Reserve Bank of New York is one of 12 regional Reserve Banks which, together with the Board of Governors in Washington, D.C., make up the Federal Reserve System. The Fed, as the system is commonly called, is an independent governmental entity created by Congress in 1913 to serve as the central bank of the United States. It is responsible for
- formulating and executing monetary policy,
- supervising and regulating depository institutions,
- providing an elastic currency,
- assisting the federal government's financing operations, and
- serving as the banker for the U.S. government.
In addition, the Federal Reserve System has important roles in operating the nation's payments systems, protecting consumers' rights in their dealings with banks and promoting community development and reinvestment.
The New York Fed oversees the Second Federal Reserve District, which includes New York state, the 12 northern counties of New Jersey, Fairfield County in Connecticut, Puerto Rico and the U.S. Virgin Islands. Though it serves a geographically small area compared with those of other Federal Reserve Banks, the New York Fed is the largest Reserve Bank in terms of assets and volume of activity.
The New York Fed employs about 2,700 officers and staff at the head office and the regional office in East Rutherford, New Jersey.
In addition to responsibilities the New York Fed shares in common with the other Reserve Banks, the New York Fed has several unique responsibilities, including conducting open market operations, intervening in foreign exchange markets, and storing monetary gold for foreign central banks, governments and international agencies. Foremost among its functions is the implementation of monetary policy, one of the three missions of the New York Fed. The other two are supervision and regulation, and international operations.
The Federal Open Market Committee (FOMC), the 12-member group, that formulates monetary policy for the Federal Reserve System, meets in Washington, D.C., usually eight times a year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
The Federal Reserve influences the economy through the market for balances that depository institutions maintain in their accounts at Federal Reserve banks. Banks keep reserves at Federal Reserve banks to meet reserve requirements and to clear financial transactions.
Transactions in the federal funds market allow depository institutions with reserve balances in excess of reserve requirements to sell reserves to institutions with reserve deficiencies at an interest rate known as the fed funds rate. The FOMC sets the target for the fed funds rate at a level it believes will foster financial and monetary conditions consistent with achieving its monetary policy objectives and adjusts that target in line with evolving economic developments.
See the FOMC section below for more detailed information and the New York Fed’s role.
The Fed uses three tools to implement monetary policy, the most important being open market operations. These “domestic operations” are conducted for the System only by the New York Fed under direction of the FOMC. Through open market operations, the Fed buys or sells U.S. Treasury securities in the secondary market to produce a desired level of bank reserves. These securities are held in the System’s portfolio, which is known as the System Open Market Account or “SOMA.”
The “primary dealers,” designated by the New York Fed, serve as its counterparties in open market operations and other securities transactions. The Fed adds extra credit to the banking system when it buys Treasury securities from the dealers and drains credit when it sells to the dealers. As the laws of supply and demand take over in the reserves market, the cost of funds for the remaining reserves finds its level at the federal funds rate.
Discount window operations, a second monetary policy tool of the Fed, provide secured short-term loans to depository institutions temporarily in need of funds. Each of the 12 Reserve Banks lends to depository institutions in its district. Under the administration of the discount window revised January 9, 2003, an eligible institution need not exhaust other sources of funds before coming to the discount window, nor are there restrictions on the purposes for which the borrower can use primary credit. Banks borrow from the "window" at the discount rate that is set by each Reserve Bank but requires the approval of the Board of Governors. The rate is adjusted occasionally to reflect changes in market conditions and monetary policy objectives.
Reserve requirements establish the proportions of demand deposit (checking) accounts and time deposits that must be held as non-interest bearing reserves at Federal Reserve Banks or as vault cash. Reserve ratios are rarely changed, and any major adjustment would be viewed as a very significant monetary policy action. An increase in reserve requirements would be regarded as an attempt to restrict bank credit and restrain economic activity. A reduction in the reserve ratio would be viewed as a stimulative monetary policy move.
Open market operations of the Federal Reserve, borrowing at the discount window and from other sources, and reserve requirements together determine the total volume of reserves available to depository institutions. These reserves affect the ability of the banking system to "create" new money by establishing an upper limit on the quantity of deposits that banks can support. This effectively sets a maximum to the amount of money that banks can lend and invest. By influencing the supply of money and, in turn, the cost and availability of credit, the Fed's actions affect economic activity and prices.
For an overview of new policy tools that the Federal Reserve has implemented to address the financial crisis that emerged during the summer of 2007, go to Credit and Liquidity Programs and the Balance Sheet feature at the Board of Governors website.
The New York Fed conducts on-site and off-site examinations of member depository institutions, and branches and agencies of foreign banks in the Second District. The Fed's responsibilities extend to all state-chartered banks that are members of the Federal Reserve System, all U.S. bank holding companies and many of the U.S. operations of foreign banking organizations. In addition, the Fed stands ready to provide temporary or long-term liquidity to any depository institution that meets its criteria for discount window borrowing.
The Fed is responsible for enforcing laws and establishing rules to protect customers of depository institutions. It also ensures that banks try to meet the credit needs of their communities by observing community reinvestment laws and laws assuring consumers fair and unbiased access to credit.
Another responsibility of the New York Fed is to serve as fiscal agent in the United States for foreign central banks and official international financial organizations. It acts as the primary contact with other foreign central banks. The services provided for these institutions include the receipt and payment of funds in U.S. dollars; purchase and sale of foreign exchange and Treasury securities; and the storage of monetary gold.
As the banker for the Federal government, the Fed clears checks drawn on the Treasury's account. Acting as fiscal agents for the government, the Reserve Banks sell, service and redeem Treasury securities. Further, currency and coin are placed into or are withdrawn from circulation in response to seasonal and cyclical shifts in the public's need for cash. Almost all U.S. currency now consists of Federal Reserve notes, which were first issued in 1914.
The New York Fed operates two types of electronic funds transfer (EFT) systems, which permit the rapid nationwide clearing and settling of electronically originated credits and debits among financial institutions. One system, Fedwire, developed and maintained by the Fed and overseen by the Fed's Wholesale Product Office, transfers large-dollar payments among Federal Reserve offices, depository institutions and federal government agencies. The New York Fed serves as the Wholesale Product Office for the Federal Reserve System. In this capacity, it is responsible for strategic planning and oversight of the Fed's large-dollar funds and securities transfer businesses, as well as its net settlement services. The majority of U.S. Fedwire transactions originate from Second District financial institutions.
The other EFT system, which makes relatively small payments, consists of national and local automated clearing house (ACH) networks operated by or with the support of Reserve Banks. The ACH system was designed to reduce the use of paper checks for routine payments. In addition, a large number of payments are cleared privately through clearing houses, such as the Clearing House Interbank System, also known as CHIPS.
In the past, the New York Fed’s East Rutherford Operations Center in New Jersey handled check processing for New Jersey and the New York Metropolitan area. However, as part of the Federal Reserve’s check restructuring process, East Rutherford check processing operations were moved to the Federal Reserve Bank of Philadelphia. These changes were made in response to the changing market, including the decline of check volumes industrywide as consumers and businesses continue to move toward electronic payments.
The Federal Reserve System was designed to ensure its political independence and its sensitivity to divergent economic concerns. The chairman and the six other members of the Board of Governors who oversee the Federal Reserve are nominated by the president of the United States and confirmed by the Senate. The president is directed by law to select governors who provide "a fair representation of the financial, agricultural, industrial and geographical divisions of the country." One term is set to expire every two years. This is to prevent any one president from saturating the Board with his or her nominees.
Federal Open Market Committee
The seven governors of the Federal Reserve Board and the president of the New York Fed are permanent voting members of the FOMC. The first vice president of only the New York Fed may vote at FOMC meetings in the president's absence. Other Reserve Bank presidents take turns serving for one year as the four remaining voting members of the committee. Non-voting Reserve Bank presidents attend and participate in discussions at all FOMC meetings. The chairman of the Board of Governors of the Federal Reserve System serves as the committee's chairman. The New York Fed president serves as the committee's vice chairman. At the end of each FOMC meeting, a directive is issued to guide the open market operations of the New York Fed until the next meeting.
Federal Reserve Banks
Each Reserve Bank is headed by a president appointed by the Bank's nine-member board of directors. Three of the directors are elected by the commercial banks in the Bank's region that are members of the Federal Reserve System. The other directors are selected to represent the public with due consideration to the interests of agriculture, commerce, industry, services, labor and consumers. Three of these six directors are elected by member banks and the other three are chosen by the Board of Governors.
The 12 Federal Reserve Banks are the operating arms of the Federal Reserve System. They supervise and regulate bank holding companies, as well as state chartered banks in their district that are members of the Federal Reserve System. Each Reserve Bank provides services to depository institutions in its respective district and functions as a fiscal agent of the U.S. government.