The Fed System is comprised of the Board of Governors in Washington, D.C. – a federal agency currently led by Chairman Ben Bernanke – plus 12 regional Reserve Banks that span the country. For example, the district overseen by the New York Fed includes all of New York, the 12 northern counties of New Jersey; Fairfield County, Connecticut; Puerto Rico and the U.S. Virgin Islands. Each Reserve Bank is distinct, with its own charter and a board of directors drawn from its district, but overseen by the Board of Governors. The law that created the Federal Reserve made the central bank independent so that policymakers could make decisions about monetary policy – such as whether to adjust interest rates – in the national interest, somewhat insulated from political pressure. However, the Fed is accountable to Congress. Congress has set an explicit objective for monetary policy: To pursue the highest level of employment consistent with price stability. This objective is often referred to as our “dual  BIS central bankers’ speeches  1  mandate,” because it combines two goals: high employment, and low and stable inflation. In order to promote these objectives, we also pay close attention to financial stability, because without financial stability, it is very hard to achieve our goals for jobs and inflation. The Federal Open Market Committee consists of the Board of Governors plus the presidents of each of the 12 district Banks.
Chart 11: Household debt and house prices Monetary policy aims to be robust by, among other things, taking into account the uncertainty associated with economic driving forces and the functioning of the economy. In addition, in the conduct of monetary policy we seek to take into account the risk of a build-up of financial imbalances. After rising sharply over many years, house prices flattened through 2013. In recent months, house prices have shown a renewed rise. Household debt has increased at a faster pace than household income over several years. A robust monetary policy aims to provide an improved path for inflation, output and employment over time. A lower key policy rate can push up both inflation and demand for goods, services and labour in the short run. On the other hand, a lower key policy rate would have augmented the risk of a further build-up of financial imbalances. A persistently pronounced increase in house prices and debt may lead to a build-up of financial imbalances that may trigger or amplify an economic downturn – with high unemployment as a result. This suggests a gradual approach in interest-rate setting. Robust banks and financial sector regulation are crucial for financial stability. Increased capital requirements for banks are now being phased in. In 2013, the Ministry of Finance assigned Norges Bank the task of providing advice on a countercyclical capital buffer for banks. In December, the Ministry set the buffer rate at 1 percent, in line with the advice issued by Norges Bank.