Treasury Department vs. Federal Reserve: Understanding Their Roles

The role of the Department of the Treasury and the Federal Reserve have important and distinct, but interrelated roles to play in the economic policy of the United States. The Department of the Treasury, headed by the Secretary of the Treasury, reports to the President of the United States, and is responsible for carrying out the fiscal policy determined by Congress. The Federal Reserve, on the other hand, does not report to any elected official, but is an independent organization formed by its member banks. The Federal Reserve, or "The Fed," is responsible for supervising banks and managing monetary policy.

Treasury Department Responsibilities

The U.S. Treasury prints and coins money via the United States Mint, manages the collection of revenue through tax receipts and through the auctioning of Treasury bonds, and issues U.S. savings bonds. The Treasury also ensures the timely payment of interest and principal to bond holders. The Treasury also has a law enforcement arm, the U.S. Marshalls, which are primarily responsible for enforcing laws prohibiting counterfeiting currency.

Role of the Federal Reserve

The Federal Reserve, under the Chairman of the Federal Reserve Board, directs the supervision and regulation of its member banks. The Federal Reserve also sets short-term interest rates by setting the discount rate, or the rate at which distressed banks can borrow directly from the Federal Reserve. The Federal Reserve also sets a target Federal Funds Rate, which is the rate banks charge each other to lend funds overnight to meet short-term obligations. The Federal Reserve also sets strict requirements on how much a bank must have on deposit in order to lend a certain amount of money.

Fiscal Versus Monetary Policy

Congress has the primary responsibility for setting the country's overall fiscal policy. Fiscal policy is the national policy regarding revenue collection, taxation, borrowing (bond issuance) and spending. Monetary policy is the primary purview of the Federal Reserve, and generally concerns the setting of short-term interest rates and control of the money supply. The purpose of U.S. monetary policy has generally been to maintain price stability, prevent runaway inflation or deflation, and maintain a sound currency.

Stimulative versus Restrictive Policies

Both Congress and the Federal Reserve have ways to stimulate the economy of the United States and to slow it down to prevent inflation. Congress, through fiscal policy, can boost the economy by lowering taxes or increasing spending to circulate more money through the economy faster, or manipulate the "velocity" of money. The Federal Reserve can boost the economy by lowering bank reserve requirements and lowering the discount rate and federal funds rate, which makes it cheaper to borrow money. However, if the stimulus is not carefully regulated, there is a danger that an increased velocity of money or an expanded money supply will cause inflation and a decline in the value of the dollar.