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.
Browse more articles on Government Issues