 Stock prices jumped after the Federal Reserve dropped its discount rate. A slower rate of growth appears likely now that a tighter money policy has been confirmed by the Federal Reserve Chairman. The Federal Reserve approved the applications of four banks to offer some new financial services. The Fed said banks have an ongoing responsibility to low-income neighborhoods under the Community Reinvestment Act. New plans to fight inflation were outlined today by the Federal Reserve. Over a century in our country's history, banks were able to issue their own money and to operate without regulation. But bank failures, worthless checks and currency, and too much or too little money frequently created panics that crippled our economy's growth. In 1913, Congress created an institution that it hoped would establish a stable monetary and banking system so that our economy could prosper. Two days before Christmas, President Woodrow Wilson signed the Federal Reserve Act into law, establishing the Federal Reserve System, our country's central bank. Over the years, Congress has broadened the Federal Reserve's goals, and today the Federal Reserve manages our country's supply of money and credit in order to promote sustained economic growth without inflation and to achieve high employment and balance in international accounts. In designing the Federal Reserve System, Congress used a unique blend of public and private elements. The System's hub is the board of governors in Washington, D.C., composed of seven members appointed by the President of the United States and confirmed by the Senate for 14-year terms. The operating arms of the system are 12 regional reserve banks and 25 branches. The reserve banks and their branches received general supervision from the board of governors in Washington as well as from district boards of directors who represent the public, banking, and commerce. This structure was designed to foster a diversity of regional economic information and viewpoints for monetary policymaking while insulating the Federal Reserve from day-to-day political pressures. It allows the Federal Reserve to concentrate on the long-run best interests of the nation. Our economy runs on a complex system of exchange of goods and services, in which money plays a key part. Coin, currency, savings, and checking accounts, the overall supply of money is managed by the Federal Reserve. Money is the medium through which economic exchanges take place, and money as a standard of value helps us to set prices for goods and services. The job of managing money, monetary policy, is to preserve the purchasing power of the dollar while ensuring that a sufficient amount of money is available to promote economic growth. The Federal Reserve also promotes the safety and soundness of the institutions where we do our banking. It ensures that the mechanisms by which we make payments, whether by cash, check, or electronic means, operate smoothly and efficiently. And in its fiscal role acts as the banker for the United States government. These duties comprise the major responsibilities of our central bank. The President and Congress make our government's taxing and spending decisions. But the Federal Reserve is responsible for setting and implementing our national policy on money and credit. This is the Fed's most important job. Monetary policy influences the overall supply of money and the availability of credit for borrowing and investment. It works by increasing or decreasing the amount of money banks can create. Banks create money when they make loans. All depository institutions must keep a percentage of deposits as reserves with the Federal Reserve Bank, and may lend out the rest. Fewer reserves mean more money can be loaned out, and fewer reserves reduce the amount of money and credit available for spending and investment. By changing the supply of reserves, the Federal Reserve can influence bank lending, economic activity, and ultimately, prices. Two instruments used in coordination change the supply of reserves, open market operations, and the discount rate. Open market operations involve buying and selling Treasury securities, the debt issues of the U.S. government. The Federal Reserve's trading desk is located in the Federal Reserve Bank of New York. When the Fed buys securities, it pays for the purchase with money it creates, which by adding to the bank balances of securities dealers adds reserves to the banking system. When the Fed sells securities, it drains reserves from the banking system, since the purchasers must draw down their bank account balances to pay the Fed. The Fed also can change the discount rate, which is the interest depository institutions pay for borrowing reserves from the Fed. Discount rate changes reflect the overall intent of monetary policy. Movements in the discount rate, coordinated with open market operations, affect bank lending, economic activity, and market interest rates. Bank monetary policy begins with the Federal Open Market Committee. This committee is made up of the seven Federal Reserve governors, the President of the New York Fed, and four of the other Reserve Bank presidents who serve one-year voting terms on a rotating basis. They are supported by economists and Reserve Bank directors who provide a broad range of regional economic information. The process of setting the discount rate also involves studying a cross-section of the country's economic viewpoints. The concerns of industries and communities are represented by Reserve Bank directors, two-thirds of whom are not bankers. By law, the directors vote on the discount rate every two weeks. Their vote is then subject to approval by the Board of Governors. Maintaining price stability while supplying our economy with enough money and credit needed for moderate growth is the goal of monetary policy. But how much is enough? The limits are set by our economy's potential for growth and employment. Too much money will push the economy toward price inflation. But not enough money results in recession. In judging the economy's tolerance and needs, the Fed must take into account the dynamics beyond its control, such as the behavior of businesses and households, the government, and developments in foreign countries. Since its establishment in 1913, the Fed has increased public confidence in our monetary system and earned a reputation as a strong and credible inflation fighter. Closely related to monetary policy is the Fed's second responsibility to promote safety and soundness in our financial system. The Federal Reserve regularly examines bank holding companies, state-chartered banks that are members of the Federal Reserve system, and the U.S. agencies of foreign banks. The Fed evaluates the financial condition of institutions, judges the riskiness of portfolios, and recommends corrective action when necessary. The examiners present their findings to the institution's management and directors. Examiners also check for compliance with consumer protection regulations designed to ensure that consumers are properly informed and treated fairly in credit transactions. The Community Reinvestment Act requires banks to make an ongoing effort to learn about and meet the needs of low-income communities. Since liquidity and flexibility are keys to a safe and sound financial system, the Federal Reserve also lends funds to depository institutions. Through the discount window, Reserve banks make loans to institutions to help them deal with short-term needs or major financial emergencies. As a result, the Federal Reserve is called the Lender of Last Resort. The third important responsibility of the Federal Reserve is to help individuals and businesses make and receive payments safely and quickly. While the Treasury mints the coins and prints the bills, the Federal Reserve actually puts cash into circulation to meet the needs of banks and their customers. Depository institutions order currency and coin from their local Reserve bank and can return the access for storage. Special scales weigh coins while high-speed machines count, sort, and bundle currency. These machines also destroy damaged currency and pull out counterfeit bills for investigation by the Secret Service. The Fed's computers sort checks according to the banks on which they were drawn. Numbers printed in magnetic ink indicate which banks reserve account to debit and which to credit. A one out of every three checks written in this country is processed by the Federal Reserve. Commercial banks handle the rest. Electronic communication has greatly increased the efficiency of our payment system. Automated clearinghouses handle high volumes of checking account payments, such as the direct deposits of payroll checks and monthly Social Security payments. Large dollar payments are made through Fedwire, a system run by the Federal Reserve. They total hundreds of billions of dollars every day. This electronic link moves funds almost instantaneously and makes them available immediately. Personal computers play an increasingly important role in a bank's electronic access to such Federal Reserve services as transferring funds and securities and receiving accounting reports. In the area of electronic banking, the Federal Reserve plays a leading role in bringing the benefits of a faster, more efficient and secure payments mechanism to the economy. The fourth role of the Federal Reserve is to act as fiscal agent for the U.S. government. In this role, the Fed serves as the Federal Government's banker, maintaining the U.S. Treasury's checking account, and clearing Treasury checks drawn on that account. An important fiscal agency service involves issuing, servicing, and redeeming savings bonds and other Treasury securities that finance the government. Auctions conducted by the Federal Reserve for the Treasury set the interest rates on newly issued Treasury bills, notes, and bonds. Its responsibilities as fiscal agent make the Federal Reserve our government's bank. As a provider and innovator of banking services that help us make payments more efficiently, the Fed is a bank to all banks. As a supervisor and regulator, the Fed safeguards the institutions where we save and borrow. As the manager of money and credit helping to foster a rising standard of living we can afford, the Federal Reserve is our country's bank. These responsibilities place the Federal Reserve at the foundation of a healthy economy. They make the Federal Reserve our nation's central bank.