NCPA - National Center for Policy Analysis

The Fed's Mandate

February 24, 2011

When the Federal Reserve was created in 1913, Congress did not give it a monetary policy goal as we understand that term today.  The Fed's monetary policy role evolved gradually, and congressional mandates -- such as achieving full employment and price stability -- came later, says Robert McTeer, a distinguished fellow with the National Center for Policy Analysis.

  • Congress created the Fed in response to financial panics culminating in the Panic of 1907.
  • Those panics spread in part because banks kept their cash reserves with each other rather than in a central location.
  • The Fed was to fix this problem by centralizing bank reserves.
  • Simply centralizing the reserves fixed much of the problem; a reserve lending facility did the rest.

The Federal Reserve's role in monetary policy gradually expanded through three tools:

  • The Fed could lend to the banks by discounting their high-quality bank loans.
  • The Fed could buy and sell Treasury Securities in the open market, becoming the principal tool of monetary policy.
  • The third tool of monetary policy was legislation authorizing the Fed to change bank reserve requirements.

Source: Robert McTeer, "The Fed's Mandate," National Center for Policy Analysis, February 24, 2011.

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