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Who influences the FED decisions


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Had an argument with a friend over the FED system, trying to figure out how FED actually make it decisions and who can influence it.

Some sources over the net state that it is actually owned and controlled  by the banks:



Wiki states that it's a hybrid institution:

The authority of the Federal Reserve System is derived from statutes enacted by the U.S. Congress and the System is subject to congressional oversight. The members of the Board of Governors, including its chair and vice-chair, are chosen by the President and confirmed by the Senate. The federal government sets the salaries of the Board's seven governors. Nationally chartered commercial banks are required to hold stock in the Federal Reserve Bank of their region; this entitles them to elect some of the members of the board of the regional Federal Reserve Bank. Thus the Federal Reserve system has both public and private aspects.



So the government choose the Chair and the board, and the banks choose the regional stuff members. However after the government have chosen the members, they can do what they decide is appropriate?


Who actually affect FEDs decisions?

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Guest Schwab711

I'll add what I can. Correct me if I understand something incorrectly! As for format, I'm pretty much scrolling through your article posted and commenting.


First, the current employees of major banks represent the depositors of the Fed and absolutely have some influence on policy/decision making. Without going into too much detail, banks represent their customers in their footprints they've set up and to simplify, the Fed at times relies on the banks to understand their customers (and by proxy, the regional economies). The Fed is also split into 12 branches with localized expertise that is consolidated at various Fed meetings or through congressional advisement/meetings (FOMC is most popular to follow). Finally, most Fed Presidents or Board Members ultimately worked at major CB or IB prior to becoming a public servant and thus likely keep close ties to former co-workers (friends).


As to your link:


I haven't found anything technically wrong but it seems a little sensationalized. Good article though. Private banks are in fact 100% of the depositors (think TBTF banks) and 100% owners. Yet, this ownership is not like equity ownership of JPM or something. The deposits are forced based on asset size (not technically but close enough and easier to understand this way), they are relatively small, and they receive 6% interest on them.


How Fed is Funded:

“When the Federal Reserve writes a check for a government bond it does exactly what any bank does, it creates money, it created money purely and simply by writing a check.”

This is absolutely correct! No different than paying than the process of a mortgage. It is a lot like the "Network Effects" we all look for to find "moat" stocks. The Fed will be able to pay the IOUs it issues because of the network in place and their flexibility to adjust the rules as time goes on. Another way to picture this is adjusting the leverage rate in a theoretical one-bank fractional reserve banking system. I'm not sure how much detail you want but there are a lot of excellent (though hard to find unbiased) sources out there.


The Fed also gives the TBTF banks an outlet to 'lend' ("absorbs"/"soaks up") their excess funds to leverage the Fed which works similar to brokered deposits at regular commercial banks. (http://en.wikipedia.org/wiki/Excess_reserves) (http://libertystreeteconomics.newyorkfed.org/2012/08/interest-on-excess-reserves-and-cash-parked-at-the-fed.html#.VQW_pfnF-Sp).


Article Summary:

“[T]he Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute.”

Like every Federal-level entity there is checks-and-balances. The Fed (privately-funded) is the issuer of T-bills/UST for the US Treasury and pays all profits to the Treasury after 6% dividends, ect. The US Treasury is operated by the executive branch which is why the statute (?) about Congress is included. Congress (Legislative branch) also can set the debt ceiling which prevents the Treasury from asking the Fed to sell unlimited UST in the market (destroying the value of our currency). The Treasury (executive branch) focuses on the government's liquidity or balance of payments while the Fed (acting as the banker of the government - http://www.investopedia.com/articles/economics/08/treasury-fed-reserve.asp) focuses on getting the best value at issuance of debt, ect. Judicial branch actually has very little oversight since I think Judicial Review is limited in scope. Don't know much about this part of C&B.



To answer your question, probably the CEOs of the Big-4 + GS/MS (and their most influential advisers) are probably providing the lion's share of direction.

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