susan schmidt bies : the federal reserve system and the economy remarks by ms susan schmidt bies, member of the board of governors of the us federal reserve system, at the american association of individual investors washington chapter meeting, arlington, virginia, 23 october 2004. * * * good morning. i ’ m certainly pleased to be here with you. the programs of the american association of individual investors play an important role in advancing the financial education of its members. folks like you - individual investors - are important participants in our economic system. as financial services firms and their products continue to evolve, people are continually challenged to improve their ability to evaluate alternative consumer and investor services. the great strength of our financial markets is that they efficiently weigh and sort the judgments of literally millions of investors, large and small, as economic conditions evolve, channeling investment dollars, at least ideally, to where they can best be used. programs such as this morning ’ s event doubtless help keep your members informed about where they may seek the highest risk - adjusted returns on their investments. i know that because you have a federal reserve policymaker here, you will want to hear how my own views of where our economy stands compare with yours. i ’ ll get to that. but first, let me offer the customary caution that the views i ’ ll express are my own and don ’ t necessarily reflect those of other policymakers or staff members of the federal reserve. and second, i want to spend some time offering you a broader perspective on the federal reserve ’ s purposes and functions, of which monetary policy is just one part, albeit a very important part, of the larger whole. at the board, we sometimes nickname this topic “ fed 101. ” in fact, the fed has a wonderful website with just that name. you can find it at www. federalreserveeducation. org. 1 the federal reserve system is generically described as the central bank of the united states. it represents our nation ’ s third, and i trust final, attempt to establish a central bank. you may well recall learning in school that, in the late eighteenth and early nineteenth centuries, the congress chartered the first bank of the united states and the second bank of the united states, but neither institution lasted more than twenty years. the banks ’ very existence was controversial and went to the heart of the great national debate, which continues to this day, over which responsibilities and powers should be handled at the federal level and which should be

risk that may arise in financial markets • supervising and regulating banking organizations to ensure the safety and soundness of the nation ’ s banking and financial system and to protect consumers from harm in their use of credit and banking services • playing a major role in operating and overseeing the nation ’ s payment system, including providing certain financial services to financial institutions, the u. s. government, and foreign official institutions • conducting monetary policy in pursuit of stable prices and maximum sustainable employment we have an all - too - recent example of the fed as a source of financial stability in its response to the financial aftermath of the terrorist attacks of september 11, 2001, which occurred just before i joined the board in december 2001. as a commercial bank executive, i was impressed with the speed at which the fed responded when the normal settlement and information systems in check and securities markets were interrupted. the fed worked immediately through discount window lending, open market operations, and other means to provide the financial and banking systems with sufficient liquidity. it worked with public - and private - sector participants to keep markets open or, if circumstances forced markets to close, to return them quickly to normal operations. as the operator and overseer of key payment systems, it had to ensure that its own systems, as well as those of the private sector, were operational. and on the monday after september 11, it lowered the target federal funds rate to help cushion the economic fallout of the blow to consumers ’ and businesses ’ confidence. because the fed worked so effectively, bankers throughout the country could serve their consumer and business customers and thereby help to minimize the economic effect of the terrorist attacks. the fed ’ s role as the supervisor of banking organizations - both as the federal supervisor of the roughly one thousand state - chartered banks that have joined the federal reserve system and as the umbrella overseer of financial and bank holding companies - gives the fed ’ s staff and policymakers the kind of hands - on experience and knowledge that is essential for a central bank during a financial crisis. the fed ’ s examiners and supervisors seek to ensure not only the safety and soundness of the banking system but also the strength of banking organizations, systems for complying with antimoney - laundering, consumer - protection, and other laws. in fact, the congress charged the federal reserve board with writing the rules that implement consumer protection laws such as the truth in savings act and the truth in lending act, though each of the various federal banking agencies enforces the regulations for the institutions within its