US Federal Reserve

Federal Reserve

From Wikipedia, the free encyclopedia.

The Federal Reserve System is headquartered in the [Eccles Building ](<http://en.wikipedia.org/wiki/Eccles_Building>)[on ](<http://en.wikipedia.org/wiki/Constitution_Avenue%28DC%29>)[Constitution](<http://en.wikipedia.org/wiki/Constitution_Avenue%28DC%29>)[ ](<http://en.wikipedia.org/wiki/Constitution_Avenue%28DC%29>)[Avenue ](<http://en.wikipedia.org/wiki/Constitution_Avenue%28DC%29>)[in ](<http://en.wikipedia.org/wiki/Washington%2C_DC>)[Washington, DC](<http://en.wikipedia.org/wiki/Washington%2C_DC>).

The Federal Reserve System (also the Federal Reserve; informally The Fed) is the [ ](<http://en.wikipedia.org/wiki/Central_bank>)[central banking system ](<http://en.wikipedia.org/wiki/Central_bank>)[of the ](<http://en.wikipedia.org/wiki/United_States>)[United States](<http://en.wikipedia.org/wiki/United_States>).

The Federal Reserve System is composed of a central Board of Governors in [ ](<http://en.wikipedia.org/wiki/Washington%2C_D.C>)[Washington, D.C. ](<http://en.wikipedia.org/wiki/Washington%2C_D.C>)[and twelve regional Federal Reserve Banks located in major cities throughout the nation. ](<http://en.wikipedia.org/wiki/Alan_Greenspan>)[Alan Greenspan ](<http://en.wikipedia.org/wiki/Alan_Greenspan>)[previously served as the ](<http://en.wikipedia.org/wiki/Chairman_of_the_Federal_Reserve>)[Chairman of the](<http://en.wikipedia.org/wiki/Chairman_of_the_Federal_Reserve>)[ ](<http://en.wikipedia.org/wiki/Chairman_of_the_Federal_Reserve>)[Board of Governors of the Federal Reserve](<http://en.wikipedia.org/wiki/Chairman_of_the_Federal_Reserve>)[. On October 24, 2005, ](<http://en.wikipedia.org/wiki/George_W.Bush>)[President Bush](<http://en.wikipedia.org/wiki/George_W.Bush>) [nominated ](<http://en.wikipedia.org/wiki/Ben_Bernanke>)[Ben Bernanke ](<http://en.wikipedia.org/wiki/Ben_Bernanke>)[to replace Greenspan as Chairman. Greenspan retires on ](<http://en.wikipedia.org/wiki/January_31>)[ ](<http://en.wikipedia.org/wiki/January_31>)[January 31](<http://en.wikipedia.org/wiki/January_31>)[, ](<http://en.wikipedia.org/wiki/2006>)[2006](<http://en.wikipedia.org/wiki/2006>), after 18 years as Chairman.

Background

The first institution with responsibilities of a central bank in the US was the [First](<http://en.wikipedia.org/wiki/First_Bank_of_the_United_States>)[ ](<http://en.wikipedia.org/wiki/First_Bank_of_the_United_States>)[Bank of the United States](<http://en.wikipedia.org/wiki/First_Bank_of_the_United_States>)[, chartered in 1791. Later, in 1816, the ](<http://en.wikipedia.org/wiki/Second_Bank_of_the_United_States>)[Second Bank of the](<http://en.wikipedia.org/wiki/Second_Bank_of_the_United_States>)[ ](<http://en.wikipedia.org/wiki/Second_Bank_of_the_United_States>)[United States ](<http://en.wikipedia.org/wiki/Second_Bank_of_the_United_States>)was chartered. From 1837 to 1862, in the _Free Banking Era _[there was no formal central bank, while from 1862 to 1913, a system of ](<http://en.wikipedia.org/wiki/National_bank>)[national banks ](<http://en.wikipedia.org/wiki/National_bank>)[was instituted by the 1863 ](<http://en.wikipedia.org/wiki/National_Banking_Act>)[National Banking Act](<http://en.wikipedia.org/wiki/National_Banking_Act>)[. A series of ](<http://en.wikipedia.org/wiki/Bank_run>)[bank runs ](<http://en.wikipedia.org/wiki/Bank_run>)later provided the impetus for the creation of a more centralized banking system.

The Federal Reserve Board was created by the [U.S. Congress ](<http://en.wikipedia.org/wiki/Congress_of_the_United_States>)[through the passing of the ](<http://en.wikipedia.org/wiki/Federal_Reserve_Act>)[Federal Reserve Act ](<http://en.wikipedia.org/wiki/Federal_Reserve_Act>)(or Owen-Glass Act[), signed into law by President ](<http://en.wikipedia.org/wiki/Woodrow_Wilson>)[Woodrow](<http://en.wikipedia.org/wiki/Woodrow_Wilson>)[ ](<http://en.wikipedia.org/wiki/Woodrow_Wilson>)[Wilson ](<http://en.wikipedia.org/wiki/Woodrow_Wilson>)[on ](<http://en.wikipedia.org/wiki/December_23>)[December 23](<http://en.wikipedia.org/wiki/December_23>)[, ](<http://en.wikipedia.org/wiki/1913>)[1913](<http://en.wikipedia.org/wiki/1913>)[.](<http://www.geocities.com/northstarzone/FED.html>)<http://www.geocities.com/northstarzone/FED.html>

Roles and responsibilities

The main tasks of the Federal Reserve are:

* Supervise and regulate banks

* Implement [monetary policy ](<http://en.wikipedia.org/wiki/Monetary_policy>)[by ](<http://en.wikipedia.org/wiki/Open_market_operation>)[open market operations](<http://en.wikipedia.org/wiki/Open_market_operation>)[, setting the ](<http://en.wikipedia.org/wiki/Discount_rate>)[discount](<http://en.wikipedia.org/wiki/Discount_rate>)[ ](<http://en.wikipedia.org/wiki/Discount_rate>)[rate](<http://en.wikipedia.org/wiki/Discount_rate>)[, and setting the ](<http://en.wikipedia.org/wiki/Fractional-reserve_banking>)[reserve ratio](<http://en.wikipedia.org/wiki/Fractional-reserve_banking>)

* Maintain a strong payments system

* Control the amount of [currency ](<http://en.wikipedia.org/wiki/Currency>)[that is made and destroyed on a day to day basis (in conjunction with the ](<http://en.wikipedia.org/wiki/United_States_Mint>)[Mint ](<http://en.wikipedia.org/wiki/United_States_Mint>)[and ](<http://en.wikipedia.org/wiki/Bureau_of_Engraving_and_Printing>)[Bureau of Engraving and Printing](<http://en.wikipedia.org/wiki/Bureau_of_Engraving_and_Printing>))

Other tasks include:

* Economic research

* Economic education

* Community outreach [[edit](<http://en.wikipedia.org/w/index.php?title=Federal_Reserve&action=edit§ion=3>)]

Organization of the Federal Reserve

Federal Reserve headquarters, Eccles Building, Washington, DC.

The Federal Reserve is comprised of a board of governors. The 7 members of the board are appointed by the [President ](<http://en.wikipedia.org/wiki/President_of_the_United_States>)[and confirmed by the ](<http://en.wikipedia.org/wiki/United_States_Senate>)[Senate](<http://en.wikipedia.org/wiki/United_States_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 his or her own full term. The ](<http://en.wikipedia.org/wiki/Federal_Open_Market_Committee>)[Federal Open Market Committee ](<http://en.wikipedia.org/wiki/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, ](<http://en.wikipedia.org/wiki/New_York>)[New York](<http://en.wikipedia.org/wiki/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 ](<http://en.wikipedia.org/wiki/Board_of_Governors>)are:

* [Alan Greenspan](<http://en.wikipedia.org/wiki/Alan_Greenspan>), Chairman

* [Roger W. Ferguson, Jr.](<http://en.wikipedia.org/wiki/Roger_W._Ferguson%2C_Jr>), Vice-Chairman

* [Susan Bies](<http://en.wikipedia.org/wiki/Susan_Bies>)

* [Donald Kohn](<http://en.wikipedia.org/wiki/Donald_Kohn>)

* [Mark Olson](<http://en.wikipedia.org/wiki/Mark_Olson>)

As of late [2005 ](<http://en.wikipedia.org/wiki/As_of_2005>)[there were two openings on the Board of Governors following the departures of ](<http://en.wikipedia.org/wiki/Ben_Bernanke>)[Ben Bernanke ](<http://en.wikipedia.org/wiki/Ben_Bernanke>)[and ](<http://en.wikipedia.org/wiki/Edward_Gramlich>)[Edward Gramlich](<http://en.wikipedia.org/wiki/Edward_Gramlich>).

Interest rates

The effective federal funds rate charted over fifty years

The Federal Reserve implements monetary policy largely by attempting to steer the [ ](<http://en.wikipedia.org/wiki/Federal_funds_rate>)[federal funds rate](<http://en.wikipedia.org/wiki/Federal_funds_rate>)[, also called the overnight rate. This is the rate that banks charge each other for overnight loans of ](<http://en.wikipedia.org/wiki/Federal_funds>)[federal funds](<http://en.wikipedia.org/wiki/Federal_funds>)[. The Federal Reserve Board affects the federal funds rate by using ](<http://en.wikipedia.org/wiki/Open_market_operations>)[open market operations](<http://en.wikipedia.org/wiki/Open_market_operations>)[, which is the purchase and sale of ](<http://en.wikipedia.org/wiki/Treasury_securities>)[ ](<http://en.wikipedia.org/wiki/Treasury_securities>)[Treasury securities](<http://en.wikipedia.org/wiki/Treasury_securities>)[. If it wants to inject ](<http://en.wikipedia.org/wiki/Money>)[money ](<http://en.wikipedia.org/wiki/Money>)into the economy, then it buys bonds, which also lowers interest rates. If it wants to lower the money supply, it sells bonds, which raises interest rates.

The Federal Reserve can also directly set the [discount rate](<http://en.wikipedia.org/wiki/Discount_rate#Monetary_Policy>), which is the interest rate that banks pay the Fed to borrow directly from it. However, banks tend to prefer to borrow from each other than directly from the Fed. The discount rate is often higher than the Federal Funds rate, and prolonged or sustained borrowing from the discount window will attract close regulatory scrutiny. Fed bank superviors will be concerned if a bank is having trouble raising funds in the open market, as this might suggest problems with the bank's credit-worthiness or solvency.

Both of these rates influence the [prime rate ](<http://en.wikipedia.org/wiki/Wall_Street_Journal_prime_rate>)which is usually about 3 percentage points higher than the federal funds rate. The 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 slow the economy by increasing the cost of borrowing. (See [monetary policy ](<http://en.wikipedia.org/wiki/Monetary_policy>)[for a fuller explanation.) The ](<http://en.wikipedia.org/wiki/IS/LM_model>)[IS/LM model ](<http://en.wikipedia.org/wiki/IS/LM_model>)[was derived from ](<http://en.wikipedia.org/wiki/John_Maynard_Keynes>)[John Maynard Keynes ](<http://en.wikipedia.org/wiki/John_Maynard_Keynes>)to explain how the demand for money, investment activity, and interest rates are connected.

The Federal Reserve usually adjusts the federal funds rate by 0.25 or 0.50 percentage points at a time. From early 2001 to mid 2003 the Federal Reserve lowered its interest rates 13 times, from 6.25 to 1.00 percent, to fight[recession](<http://en.wikipedia.org/wiki/Recession>)[. In ](<http://en.wikipedia.org/wiki/November>)[November ](<http://en.wikipedia.org/wiki/November>)[2002](<http://en.wikipedia.org/wiki/2002>)[, rates were cut to 1.75, and many interest rates went below the ](<http://en.wikipedia.org/wiki/Inflation>)[inflation ](<http://en.wikipedia.org/wiki/Inflation>)rate. (This is known as a _negative _[interest rate, because money paid back from a loan with an interest rate less than inflation is worth less than its original value.) On ](<http://en.wikipedia.org/wiki/June_25>)[June 25](<http://en.wikipedia.org/wiki/June_25>)[, ](<http://en.wikipedia.org/wiki/2003>)[2003](<http://en.wikipedia.org/wiki/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 ](<http://en.wikipedia.org/wiki/June>)[June](<http://en.wikipedia.org/wiki/June>)[,](<http://en.wikipedia.org/wiki/As_of_2004>)[2004](<http://en.wikipedia.org/wiki/As_of_2004>), the Federal Reserve started to raise the target interest rate. As of December 2005, the rate is at

1. percent; this is the result of thirteen 0.25 percent increases.

The Federal Reserve can also attempt to use [open market operations ](<http://en.wikipedia.org/wiki/Open_market_operations>)to change long- term interest rates, but its "buying power" on the market is significantly smaller than private institutions. The Fed can also attempt to "jawbone" the markets into moving towards the Fed's desired rates, but this is not always effective.

The Reserve Banks

Federal Reserve Regions

The twelve regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation's central banking system, are organized much like private corporations—possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year.[[1]](<http://minneapolisfed.org/info/sys/faq/frs.cfm#3>)

The dividends paid to member banks are considered partial compensation for the lack of interest paid on member banks' required reserves held at the Fed. By law, banks in the United States must maintain fractional reserves, most of which are kept on account at the Fed. The Federal Reserve does not pay interest on these funds.

The Federal Reserve System was created via the Federal Reserve Act of 1913 which "established a new central bank designed to add both flexibility and strength to the nation's financial system." The legislation provided for a system that included a number of regional Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks could join. The Reserve Banks opened for business in November 1914. Congress created [Federal Reserve Notes ](<http://en.wikipedia.org/wiki/Federal_Reserve_Note>)to provide the nation with an elastic supply of currency. The notes were to be issued to Reserve Banks for subsequent transmittal to banking institutions in accordance with the needs of the public.

The Federal Reserve Districts are listed below along with their identifying letter and number. These are used on [Federal Reserve Notes ](<http://en.wikipedia.org/wiki/Federal_Reserve_Note>)to identify the issuing bank for each note.

[Boston ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Boston>)[A 1 ](<http://www.bos.frb.org/>)[[2]](<http://www.bos.frb.org/>)

[New York ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_New_York>)[B 2 ](<http://www.newyorkfed.org/>)[[3]](<http://www.newyorkfed.org/>)

[Philadelphia ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Philadelphia>)[C 3 ](<http://www.philadelphiafed.org/>)[[4]](<http://www.philadelphiafed.org/>)

[Cleveland ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Cleveland>)[D 4 ](<http://www.clevelandfed.org/>)[[5]](<http://www.clevelandfed.org/>)

[Richmond ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Richmond>)[E 5 ](<http://www.richmondfed.org/>)[[6]](<http://www.richmondfed.org/>)

[Atlanta ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Atlanta>)[F 6 ](<http://www.frbatlanta.org/>)[[7]](<http://www.frbatlanta.org/>)

[Chicago ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Chicago>)[G 7 ](<http://www.chicagofed.org/>)[[8]](<http://www.chicagofed.org/>)

[St Louis ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_St_Louis>)[H 8 ](<http://www.stlouisfed.org/>)[[9]](<http://www.stlouisfed.org/>)

[Minneapolis ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Minneapolis>)[I 9 ](<http://www.minneapolisfed.org/>)[[10]](<http://www.minneapolisfed.org/>)

[Kansas City ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Kansas_City>)[J 10 ](<http://www.kansascityfed.org/>)[[11]](<http://www.kansascityfed.org/>)

[Dallas ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Dallas>)[K 11 ](<http://www.dallasfed.org/>)[[12]](<http://www.dallasfed.org/>)

[San Francisco ](<http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_San_Francisco>)[L 12 ](<http://www.frbsf.org/>)[[13]](<http://www.frbsf.org/>)

Legal Status and Position in Government

The Federal Reserve System is an [independent government agency](<http://en.wikipedia.org/wiki/Independent_agencies_of_the_United_States_government>)[. It is subject to laws like the ](<http://en.wikipedia.org/wiki/Freedom_of_Information_Act>)[Freedom of Information Act ](<http://en.wikipedia.org/wiki/Freedom_of_Information_Act>)[and the ](<http://en.wikipedia.org/w/index.php?title=Privacy_Act&action=edit>)[Privacy Act ](<http://en.wikipedia.org/w/index.php?title=Privacy_Act&action=edit>)[which cover Federal agencies and not private entities. However, its decisions do not have to be ratified by the ](<http://en.wikipedia.org/wiki/President_of_the_United_States>)[President ](<http://en.wikipedia.org/wiki/President_of_the_United_States>)[or anyone else in the ](<http://en.wikipedia.org/wiki/Executive%28government%29>)[executive ](<http://en.wikipedia.org/wiki/Executive%28government%29>)[or ](<http://en.wikipedia.org/wiki/Legislative>)[legislative ](<http://en.wikipedia.org/wiki/Legislative>)[branches of government, it does not receive funding from Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. Once a member of the Board of Governors is appointed by the president, he or she is almost as independent as a ](<http://en.wikipedia.org/wiki/U.S.Supreme_Court>)[U.S. Supreme Court ](<http://en.wikipedia.org/wiki/U.S.Supreme_Court>)judge, although it is not a lifetime appointment.

In the 1982 case Lewis v. United States , the [Ninth Circuit Federal Court of Appeals](<http://en.wikipedia.org/wiki/United_States_Court_of_Appeals_for_the_Ninth_Circuit>) stated that the "Federal reserve banks are not federal instrumentalities for purposes of a Federal Torts Claims Act, but are independent, privately owned and locally controlled corporations." The opinion also stated that "the Reserve Banks have properly been held to be federal instrumentalities for some purposes."

Influence of Government

Central bank independence from political control is a crucial concept in both economic theory and practice. The problem arises as central banks strive to maintain a credible commitment to price stability, when the markets know that there is political pressure to keep interest rates low. Low interest rates tend to keep unemployment below trend, encourage economic growth, and allow for cheap credit and loans.

Unfortunately, such a policy is not sustainable without accelerating inflation in the long term. Thus, a central bank believed to be under political control cannot make a credible commitment to fight inflation, as the markets know that sitting politicians will lobby to keep rates low. This point was one of the major research topics of economist [Edward C. Prescott](<http://en.wikipedia.org/wiki/Edward_C._Prescott>)'s career. It is in this limited sense that the Federal Reserve System is independent. The members of the FOMC are not elected and do not answer to politicians in making their interest rate decisions.

The Federal Reserve is financially independent because it runs a surplus, due in part to its ownership of [government bonds](<http://en.wikipedia.org/wiki/Government_bond>)[. In fact, it returns billions of dollars to the government each year. However, the Fed is still subject to oversight by the Congress, which periodically reviews its activities and can alter its responsibilities by ](<http://en.wikipedia.org/wiki/Statute>)[statute](<http://en.wikipedia.org/wiki/Statute>)[. To further communication with Congress, the Fed delivers a ](<http://en.wikipedia.org/wiki/Monetary_Policy_Report_to_the_Congress>)[report ](<http://en.wikipedia.org/wiki/Monetary_Policy_Report_to_the_Congress>)[to both houses semiannually. Its independence from the ](<http://en.wikipedia.org/wiki/Executive_branch>)[executive branch ](<http://en.wikipedia.org/wiki/Executive_branch>)[was strengthened by the ](<http://en.wikipedia.org/wiki/1951_Accord>)[ ](<http://en.wikipedia.org/wiki/1951_Accord>)[1951 Accord](<http://en.wikipedia.org/wiki/1951_Accord>). In general, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government.

Fractional-Reserve Banking

In its role of setting reserve requirements for the country's banking system, the Fed regulates what is known as [fractional-reserve banking](<http://en.wikipedia.org/wiki/Fractional-reserve_banking>)[. This is the common practice by banks of retaining only a fraction of their deposits to satisfy demands for withdrawals, lending the remainder at interest to obtain income that can be used to pay interest to depositors and provide profits for the banks' owners. Some people also use the term to refer to ](<http://en.wikipedia.org/wiki/Fiat_money>)[fiat money](<http://en.wikipedia.org/wiki/Fiat_money>)[, which is money that is not backed by a tangible asset such as ](<http://en.wikipedia.org/wiki/Gold>)[gold](<http://en.wikipedia.org/wiki/Gold>).

Fractional reserves are very easily abused and rules for these will necessarily favour certain activities in the economy very systematically over others. The United States' rules and oversight are within limits and guidelines set by the [Bank for International](<http://en.wikipedia.org/wiki/Bank_for_International_Settlements>)[ ](<http://en.wikipedia.org/wiki/Bank_for_International_Settlements>)[Settlements](<http://en.wikipedia.org/wiki/Bank_for_International_Settlements>)[, a peer agency to the ](<http://en.wikipedia.org/wiki/IMF>)[IMF ](<http://en.wikipedia.org/wiki/IMF>)[and the ](<http://en.wikipedia.org/wiki/World_Bank>)[World Bank ](<http://en.wikipedia.org/wiki/World_Bank>)[that was originally set up as one of the ](<http://en.wikipedia.org/wiki/Bretton_Woods>)[Bretton Woods ](<http://en.wikipedia.org/wiki/Bretton_Woods>)[set of institutions. More recently the ](<http://en.wikipedia.org/wiki/WTO>)[WTO ](<http://en.wikipedia.org/wiki/WTO>)has been regarded also as such a peer.

Criticisms of the Fed

A large and varied group of criticisms are often directed against the Federal Reserve. Some of these criticisms relate to [inflation ](<http://en.wikipedia.org/wiki/Inflation>)[and ](<http://en.wikipedia.org/wiki/Fractional_reserve_banking>)[fractional reserve banking ](<http://en.wikipedia.org/wiki/Fractional_reserve_banking>)[more generally, and an in-depth treatment these issues may be found in their respective articles. There are also specific issues relating to the chairmanship of ](<http://en.wikipedia.org/wiki/Alan_Greenspan>)[Alan Greenspan](<http://en.wikipedia.org/wiki/Alan_Greenspan>), specifically, that the Fed’s credibility is based on a cult of personality around him, but this line of argument is also more thoroughly addressed in his article. Nonetheless,

critics still point to a number of specific criticisms about the methods and actions of the Fed; these are treated below.

Historical Criticisms

Criticisms of the Fed are not new, and some historical criticisms are reflective of current concerns, Specifically, [Austrian School ](<http://en.wikipedia.org/wiki/Austrian_School>)[economists blame the Fed’s expansionary monetary policy in the 1920’s, allowing misallocations of capital resources and supporting a massive stock price bubble. Others argue that the Fed then deepened the resulting ](<http://en.wikipedia.org/wiki/Great_Depression>)[Great Depression ](<http://en.wikipedia.org/wiki/Great_Depression>)by contracting the money supply at the very moment that markets needed liquidity. These criticisms resemble concerns that the current Fed over-emphasizes consumer spending, and has thus not been aggressive enough in reducing US dependence on oil and energy-intensive capital goods, and allowing household debt to accumulate to excessively large levels.

Economic Indicators

Some critics argue that the Fed’s concentration on GDP or other aggregate indicators risks ignoring important changes in regional economies, and is an unsuitable proxy as an indicator of well-being.

For example, critics argue that the Fed’s focus on reducing national inflation made it unable to adequately respond to the economic problems in the aftermath of Hurricane Katrina. Specifically, the Fed began to tighten interest rates almost immediately after the Hurricane, which some see as evidence that the Fed has ignored the large losses in that devastated region. They argue that the Fed’s concern with aggregate national inflation measures, and the inflationary aspects of the large reconstruction effort (especially the potential for larger government budget deficits), made it unable to deal properly with the highly unusual but particularly devastating situation.

Another criticism is that the Fed places too much emphasis on GDP as a measure of well-being. Critics point to programs in the UK and Canada, such as the [Genuine](<http://en.wikipedia.org/wiki/Genuine_Progress_Indicator>)[ ](<http://en.wikipedia.org/wiki/Genuine_Progress_Indicator>)[Progress Indicator](<http://en.wikipedia.org/wiki/Genuine_Progress_Indicator>)[, which are intended to be a better indicator of both the benefits and costs of economic growth. Even more conservative commentators believe ](<http://en.wikipedia.org/wiki/Net_Domestic_Product>)[Net](<http://en.wikipedia.org/wiki/Net_Domestic_Product>)[ ](<http://en.wikipedia.org/wiki/Net_Domestic_Product>)[Domestic Product ](<http://en.wikipedia.org/wiki/Net_Domestic_Product>)[is a far better indicator than GDP of ](<http://en.wikipedia.org/wiki/Economic_growth>)[economic growth](<http://en.wikipedia.org/wiki/Economic_growth>), as GDP hides uneconomic growth and can lead to improoper decisions.

However, this idea remains controversial. The Fed is notoriously tight-lipped about the measures and metrics which are used to make its decisions (see Opacity, directly below), and there is no support in the released transcripts (available for meetings up until 1999) for the notion that the Fed is overly focused on GDP and inflation alone. Rather, the transcripts indicate that the Fed watches a very wide basket of indicators, and that the members of the FOMC are certainly aware of the limitations of the GDP measure.

Opacity

Another criticism of the Federal Reserve is that it is shrouded in secrecy. Meetings are held behind closed doors, and the transcripts are released with a lag of five years. The jargon-laden fence-sitting opaque style of Fed communication is often called "Fed

speak." Even expert policy analysts are unsure as to the logic behind Fed decisions. Critics argue that such opacity leads to greater market volatility, as the markets must guess, often with only limited information, about how the Fed is likely to change policy in the future.

Furthermore, the lag in the release of FOMC transcripts, as well as the extremely limited and carefully worded minutes and statement, leads to the public being unaware of the issues of major concern to the Fed, and leaves it with an inadequate understanding of the logic and rationale behind the decisions. Some argue that this is a concerted attempt to keep Congress and the public at arm’s length, but this criticism has not gained much widespread acceptance.