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Understanding the Federal Reserve, its Role, and its Limitations

Charles I. Plosser

This year’s annual report, entitled The Federal Reserve and You, highlights a new educational video about our nation’s central bank, which is the culmination of more than three years of work by staff at the Federal Reserve Bank of Philadelphia, in partnership with Federal Reserve System colleagues.

The cover article, “The Making of The Federal Reserve and You,” provides the behind-the-scenes story and describes how the video’s chapters explain the Federal Reserve’s key roles in our nation’s payments system, in conducting monetary policy, and in the supervision and regulation of banking institutions. The video, which is available on DVD or from our website, also includes chapters on the basics of money and banking and the history of U.S. central banking. While the primary audience is high school students, we expect that consumers and community and business groups will find this resource helpful in understanding the Federal Reserve, why it was created, and how it touches the lives of all Americans.

I believe it is also important to understand the limitations of our role as a central bank. In this year’s essay, “Fiscal Policy and Monetary Policy: Restoring the Boundaries,” I describe the differences between fiscal and monetary policy, and why it is important to have a bright line separating them. Unfortunately, over the past few years, the global financial crisis and sustained fiscal imbalances in many countries have blurred that line. Asking monetary policy to take on fiscal responsibilities undermines the discipline of the fiscal authorities, the independence of the central bank, and our ability to achieve the goals of monetary policy assigned to the central bank.

The annual report includes a message from First Vice President Blake Prichard and Bank Highlights of our accomplishments during 2012. I especially note our work on key Federal Reserve System projects, such as the work on model validation for the Comprehensive Capital Analysis and Review (CCAR), mandated by the Dodd-Frank Act. Researchers in the Payment Cards Center helped study debit card interchange fees at the Board of Governors. The Philadelphia Fed and the Kansas City Fed continue to staff and manage a System resource — Risk Assessment, Data Analysis, and Research (RADAR) — which helps optimize the use of data to identify and monitor financial risks. And economists in our Research Department studied the use of dynamic stochastic general equilibrium (DSGE) models in monetary policymaking and provided other important staff work to the Federal Open Market Committee.

Our Bank also hosted 18 major conferences and seminars last year to share research with the public, including the biennial “Reinventing Older Communities” conference featured in the Bank Highlights section of this report.

Board of Directors and Advisory Councils

The citizens who serve on the Bank’s board of directors and advisory councils have a unique insight into the many roles that we play in the economy. I am grateful for the continued advice and counsel of the nine citizens who serve on the board. In 2012, Jeremy Nowak, president of J Nowak and Associates, LL C, and James E. Nevels, chairman and founder of The Swarthmore Group, completed their first years as chairman and deputy chairman, respectively.

Both were reappointed to these roles in 2013. Also in 2013, we welcomed David R. Hunsicker, chairman, president, and CEO of New Tripoli Bank, and Rosemary Turner, president of the United Parcel Service’s (UPS) Chesapeake District, to the board. They replace Deborah M. Fretz, retired president and CEO of Sunoco Logistics, and Aaron L. Groff, Jr., chairman, president, and CEO of Ephrata National Bank, who completed their terms in 2012. I thank them both for their service and advice.

The Economic Advisory Council (EAC) includes representatives from diverse industries, manufacturers, as well as nonprofits in the Third District. In 2012, we welcomed Michael Araten, president and CEO, the Rodon Group and K’NEX Brands; Thomas J. Doll, president, COO, and CFO of Subaru of America, Inc.; Bill Polacek, president and CEO, JWF Industries and JWF Defense Systems, LL C, in Johnstown; and M. Shawn Puccio, senior vice president of finance, Saint-Gobain Corporation.

In 2012, we also appointed Richard A. Grafmyre, president and CEO of Jersey Shore State Bank, and Gerald L. Reeves, president, CEO, and director of Sturdy Savings Bank, to the Community Depository Institutions Advisory Council (CDIAC), which includes representatives from commercial banks, thrift institutions, and credit unions in the Third District. In addition, Dennis D. Cirucci, president, CEO, and director of Alliance Bancorp Inc. and Alliance Bank, was selected from our CDIAC to serve on the Federal Reserve Board’s CDIAC with his peers from around the Federal Reserve System.

I also thank Bharat Masrani, president and CEO of TD Bank, N.A., for his continued service as the Third District’s representative to the Federal Advisory Council, which meets quarterly with the Board of Governors in Washington, D.C.

Finally, I offer my sincere thanks to the talented and dedicated employees at the Philadelphia Fed. I am proud of their many contributions to the Bank, to the Federal Reserve System, and to the community. If you really want to understand The Federal Reserve and You, know that people here and around the System all share a common commitment to public service that helps support a sound economy. We look forward to working with you in the year ahead.

Charles Plosser Signature
Charles I. Plosser
President and Chief Executive Officer
June 2013