Presenttion to the Psden Business Community o-sponsored y the Psden Chmer of Commere Hilton Hotel, Psden, Cliforni For delivery Wednesdy, My 1, 2002, 8:10 AM Pifi Time, 11:10 AM Estern By Roert T. Prry, President nd CEO of the Federl Reserve Bnk of Sn Frniso The Role of the Federl Reserve in the Eonomy I. Good morning. It s plesure to e with you tody. A. I d like to try to nswer some of the questions tht I often her people sk: 1. Wht s the Fed s role in the eonomy? 2. How does it funtion? 3. Wht n it do for the eonomy? II. I ll egin y desriing the Fed s role in nutshell: A. As the ntion s entrl nk, the Fed silly does three things: 1. It works to keep the nking, finnil, nd pyments systems sfe, sound, nd stle. 2. It lso provides finnil servies to the government nd the puli. 3. Finlly--nd very importntly--the Fed s ondut of monetry poliy ontriutes to the long-run helth of the eonomy y promoting mximum sustinle employment nd stle pries. B. Sine its founding in 1913, it hs evolved with some speil hrteristis: 1. puli nd privte 2. ntionl nd regionl 3. sujet to ongressionl oversight, ut independent nd insulted from dy to dy politil pressures. 1
4. These hrteristis rete importnt heks nd lnes for ondut of poliy nd opertions. C. Struture emodies puli/privte, ntionl/regionl, independent hrteristis 1. BOG in Wshington: 7 memers with stggered 14-yer terms; ppointed y President with onsent of Sente; Chirmn preeminent. 2. 12 Reserve Bnks over ll 50 sttes Reserve Bnks re eh inorported nd hve own ords of diretors, (1) mde up of nkers, usinesspeople, nd the generl puli. 3. SF Fed--Twelfth Distrit Hedqurters plus four rnhes over lrgest geogrphi territory nine westernmost sttes nerly one-fifth totl US popultion nd employment nd lmost one-sixth of totl U.S. nking ssets. D. Reserve nks provide nking servies, nk supervision nd regultion, nd disount window. 1. Bnking servies hek proessing nd olletion (1) SF hndles over nine million heks per dy eletroni wire pyments system (Fedwire) (1) System hndles $2 trillion per dy (2) nd Sn Frniso Fed ounts for out ten perent of tht other eletroni pyments servies (ACH) 2
d nker for U.S. Tresury (1) hndles pyments for Tresury through ount t Fed (2) sells Tresury seurities nd keeps trk of ownership through ook entry system (3) provides fit oin nd urreny 2. Supervision nd Regultion d e Stte-hrtered memer nks All nk holding ompnies Foreign nks operting in U.S. Lrge finnil onglomertes tht own nks, suh s Chrles Shw nd Countrywide Mortgge Consumer protetion regultions 3. Disount Window provides temporry funds ginst ollterl to depository institutions III. Monetry poliymking lso reflets ntionl/regionl, puli/privte, independent hrteristis. A. Conduted y FOMC 1. 12 memers: 7 Governors plus 5 Reserve Bnk presidents on rotting sis. 2. All Reserve Bnk presidents ttend FOMC meetings nd prtiipte fully in disussions, providing independent perspetive on ntionl poliy nd regionl informtion. B. The tools the Fed uses to ondut poliy re 1. open mrket opertions--federl funds rte 3
2. disount rte. 3. With these tools, the Fed n ffet redit onditions in the eonomy, whih ffet people s demnd for goods nd servies, nd ultimtely eonomi performne. IV. Now some of wht I ve desried my seem kind of strt to you. A. But I think I n ring it to life y telling you it out how the Fed reted to tht disstrous dy, Septemer 11, 2001. 1. All of the funtions I ve just desried me into ply in the most drmti wy during those drk dys. B. Of ourse, the most profound effets were felt t the Federl Reserve Bnk of New York. 1. It s just steps wy from where the World Trde Center ws, 2. nd it s where the Fed tully hndles the trding involved in implementing monetry poliy. C. But with the ntion s mrkets nd trnsporttion systems fing mssive disruptions, 1. every Reserve Bnk hd role to ply in ensuring the viility of our finnil system nd our eonomy. 2. And, s I go through the funtions, I ll highlight some speil efforts y the people in our Los Angeles Brnh, who rose to meet some enormous hllenges. D. Within hours of the ttks, Fed Vie Chirmn Ferguson issued this nnounement: 1. The Federl Reserve System is open nd operting. The disount window is ville to meet liquidity needs. 2. These few words sid lot. 4
They gve the puli nd the mrkets onfidene tht the Fed stood redy to do its prt to keep the wheels of the eonomy from grinding to hlt. E. In our role s nk supervisors, 1. we nd other nking genies enourged nks to work with their ustomers to help meet their legitimte redit needs. F. In terms of the pyments system, we kept things moving in vitl servies like eletroni funds trnsfers, hek-lering, nd urreny proessing. 1. This took some extrordinry efforts. 2. For exmple, in the heks re, the Sn Frniso Fed typilly uses ommeril flights to move heks round, oth within the Twelfth Distrit nd mong the other Distrits. With ommeril flights grounded, we hd to ome up with lterntives fst. So within the Distrit whih, let me remind you, is huge, the iggest in the System we hired ouriers, rented truks, nd used our own vns to get things moving. Just to give you n ide of how enormous tsk it ws, t one point the Los Angeles Brnh lone hd to figure out how to get nine thousnd pounds of heks from the rnh uilding to rgo plne in Burnk. 3. Employees in the urreny re lso went to extrordinry lengths to keep sh moving. This ws espeilly ritil for our Distrit Bnk, euse we hve ntionl responsiility for the Fed s sh servies. We quikly notified our ustomers nd the press tht we were open nd redy to serve their needs, nd we extended our hours of opertion signifintly. G. Now let me turn to the onerns out liquidity. This silly mens we were onerned out lokges in the flow of money nd redit. This ould hve eome huge prolem. 5
1. And so the Fed met it with huge response. d We injeted mssive mount of liquidity into the finnil system. And we used not only the tools I ve lredy mentioned open mrket opertions nd the Disount Window. We lso used every ville vehile we ould think of inluding flot, overdrfts, swps with foreign entrl nks. 2. The dy fter the ttks, the totl injetion mounted to over one hundred illion dollrs! H. Another ritil step ws to lower short-term interest rtes. 1. We did so twie over the next three weeks 2. y one hundred sis points in totl. V. These nd mny other tions helped ensure tht the finnil mrkets ould funtion effiiently s soon s possile. A. But tht, of ourse, ws not our ultimte gol. 1. Then nd now it is only mens to our ultimte gol. B. In providing servies nd onduting poliy, one onern is uppermost for the Federl Reserve. 1. And tht is keeping this eonomy on trk to produe sustinle employment nd stle pries two ornerstones of Amerin eonomi well-eing nd prosperity. # # # 6