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Federal Reserve (the Fed)

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Definition of Federal Reserve (the Fed)

Federal Reserve (the Fed) Image 1

Federal Reserve (the Fed)

The central bank in the United States, responsible for setting interest rates.



Related Terms:

Federal Reserve Banks

The twelve district banks in the federal reserve System.


Federal Reserve Board

Board of Governors of the federal reserve System.


Federal Reserve System

The central bank of the U.S., established in 1913, and governed by the federal
reserve Board located in Washington, D.C. The system includes 12 federal reserve Banks and is authorized
to regulate monetary policy in the U.S. as well as to supervise federal reserve member banks, bank holding
companies, international operations of U.S.banks, and U.S.operations of foreign banks.


Federal Reserve System

The central banking authority responsible for monetary policy in the United States.


Cookie Jar Reserves

An overly aggressive accrual of operating expenses and the creation of
liability accounts done in an effort to reduce future-year operating expenses.



Electronic Federal Tax Payment Systems (EFTPS)

An electronic funds transfer system used by businesses to remit taxes to the government.


Excess reserves

Any excess of actual reserves above required reserves.


Federal Reserve (the Fed) Image 2

Excess Reserves

reserves of commercial banks in excess of those they are legally required to hold.


Fed

See federal reserve System.


Federal agency securities

Securities issued by corporations and agencies created by the U.S. government,
such as the federal Home Loan Bank Board and Ginnie Mae.


Federal credit agencies

Agencies of the federal government set up to supply credit to various classes of
institutions and individuals, e.g. S&Ls, small business firms, students, farmers, and exporters.


Federal Deposit Insurance Corporation (FDIC)

A federal institution that insures bank deposits.


Federal Employer Identification Number

A unique identification number issued
by the federal government used for payroll purposes to identify the company
when it deals with the Internal Revenue Service.


Federal Financing Bank

A federal institution that lends to a wide array of federal credit agencies funds it
obtains by borrowing from the U.S. Treasury.


Federal funds

Non-interest bearing deposits held in reserve for depository institutions at their district federal
reserve Bank. Also, excess reserves lent by banks to each other.


Federal funds market

The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.


Federal funds rate

This is the interest rate that banks with excess reserves at a federal reserve district bank
charge other banks that need overnight loans. The fed Funds rate, as it is called, often points to the direction
of U.S. interest rates.


Federal Funds Rate

The interest rate at which banks lend deposits at the federal reserve to one another overnight.



Federal Home Loan Banks

The institutions that regulate and lend to savings and loan associations. The
federal Home Loan Banks play a role analogous to that played by the federal reserve Banks vis-à-vis
member commercial banks.


Federal Insurance Contributions Act of 1935 (FICA)

A federal Act authorizing the government to collect Social Security and Medicare payroll taxes.


Federal Open Market Committee (FOMC)

fed committee that makes decisions about open-market operations.


Federal Unemployment Tax Act (FUTA)

A federal Act requiring employers to pay a tax on the wages paid to their employees, which is then used to create a
pool of funds to be used for unemployment benefits.


Federally related institutions

Arms of the federal government that are exempt from SEC registration and
whose securities are backed by the full faith and credit of the U.S. government (with the exception of the
Tennessee Valley Authority).


Fedwire

A wire transfer system for high-value payments operated by the federal reserve System.


Foreign Exchange Reserves

A fund containing the central bank's holdings of foreign currency or claims thereon.


Forward Fed funds

fed funds traded for future delivery.


Fractional Reserve Banking

A banking system in which banks hold only a fraction of their outstanding deposits in cash or on deposit with the central bank.


Freddie Mac (Federal Home Loan Mortgage Corporation)

A Congressionally chartered corporation that
purchases residential mortgages in the secondary market from S&Ls, banks, and mortgage bankers and
securitizes these mortgages for sale into the capital markets.



Free reserves

Excess reserves minus member bank borrowings at the fed.


International Reserves

See foreign exchange reserves.


Legal Reserve Requirement

See reserve requirement.


Official reserves

Holdings of gold and foreign currencies by official monetary institutions.


Required reserves

The dollar amounts based on reserve ratios that banks are required to keep on deposit at a federal reserve Bank.


Required Reserves

reserves that the central bank requires commercial banks to hold.


Reserve

An accounting entry that properly reflects the contingent liabilities.


Reserve currency

A foreign currency held by a central bank or monetary authority for the purposes of
exchange intervention and the settlement of inter-governmental claims.


Reserve Currency

A currency, frequently the U.S. dollar, that is used by other countries to denominate the assets they hold as international reserves.


Reserve Ratio

See reserve requirement.


Reserve Ratio

This calculation is used by states to determine the unemployment contribution rate to charge employers. The ongoing balance of a firm’s unclaimed
contributions from previous years is reduced by unemployment claims for the past year and then divided by the average annual payroll, resulting in a "reserve ratio".


Reserve ratios

Specified percentages of deposits, established by the federal reserve Board, that banks must
keep in a non-interest-bearing account at one of the twelve federal reserve Banks.


Reserve Requirement

Fraction of total deposits that a commercial bank is required by the central bank to hold in the form of reserves.


Reserve requirements

The percentage of different types of deposits that member banks are required to hold
on deposit at the fed.


Reserved material

Material that has been reserved for a specific purpose.


Reserves

Commercial banks' reserves consist of their holdings of cash and their balances in deposits with the central bank. See also foreign exchange reserves, excess reserves, required reserves, reserve requirement.


Term Fed Funds

fed Funds sold for a period of time longer than overnight.


Bank for International Settlements (BIS)

An international bank headquartered in Basel, Switzerland, which
serves as a forum for monetary cooperation among several European central banks, the Bank of Japan, and the
U.S. federal reserve System. Founded in 1930 to handle the German payment of World War I reparations, it
now monitors and collects data on international banking activity and promulgates rules concerning
international bank regulation.


Discount rate

The interest rate that the federal reserve charges a bank to borrow funds when a bank is
temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the
fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings.


Discount Window

The federal reserve facility at which reserves are loaned to banks at the discount rate.


Edge corporations

Specialized banking institutions, authorized and chartered by the federal reserve Board
in the U.S., which are allowed to engage in transactions that have a foreign or international character. They
are not subject to any restrictions on interstate banking. Foreign banks operating in the U.S. are permitted to
organize and own and Edge corporation.


Initial margin requirement

When buying securities on margin, the proportion of the total market value of
the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the board of
governors of the federal reserve the responsibility to set initial margin requirements, but individual
brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by
the exchange.


Monetary policy

Actions taken by the Board of Governors of the federal reserve System to influence the
money supply or interest rates.


Registered Pension Plan

Commonly referred to as an RPP this is a tax sheltered employee group plan approved by federal and Provincial governments allowing employees to have deductions made directly from their wages by their employer with a resulting reduction of income taxes at source. These plans are easy to implement but difficult to dissolve should the group have a change of heart. Employer contributions are usually a percentage of the employee's salary, typically from 3% to 5%, with a maximum of the lessor of 20% or $3,500 per annum. The employee has the same right of contribution. Vesting is generally set at 2 years, which means that the employee has right of ownership of both his/her and his/her employers contributions to the plan after 2 years. It also means that all contributions are locked in after 2 years and cannot be cashed in for use by the employee in a low income year. Should the employee change jobs, these funds can only be transferred to the RPP of a new employer or the funds can be transferred to an individual RRSP (or any number of RRSPs) but in either scenario, the funds are locked in and cannot be accessed until at least age 60. The only choices available to access locked in RPP funds after age 60 are the conversion to a Life Income Fund or a Unisex Annuity.
To further define an RPP, Registered Pension Plans take two forms; Defined Benefit or Defined Contribution (also known as money purchase plans). The Defined Benefit plan establishes the amount of money in advance that is to be paid out at retirement based usually on number of years of employee service and various formulae involving percentages of average employee earnings. The Defined Benefit plan is subject to constant government scrutiny to make certain that sufficient contributions are being made to provide for the predetermined pension payout. On the other hand, the Defined Contribution plan is considerably easier to manage. The employer simply determines the percentage to be contributed within the prescribed limits. Whatever amount has grown in the employee's reserve by retirement determines how much the pension payout will be by virtue of the amount of LIF or Annuity payout it will purchase.
The most simple group RRSP plan is a group billed RRSP. This means that each employee has his own RRSP plan and the employer deducts the contributions directly from the employee's wages and sends them directly to the RRSP plan administrator. Regular RRSP rules apply in that maximum contribution in the current year is the lessor of 18% or $13,500. Generally, to encourage this kind of plan, the employer also agrees to make a regular contribution to the employee's plans, knowing full well that any contributions made immediately belong to the employee. Should the employee change jobs, he/she can take their plan with them and continue making contributions or cash it in and pay tax in the year in which the money is taken into income.



 

 

 

 

 

 

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