Adapting, Evolving, Learning

The Federal Reserve is an adapting, evolving, and learning organization. In the Federal Reserve Bank of Cleveland's 2012 Annual Report, we take a close look at how it has changed since its creation 100 years ago. Our essay describes some of the seminal episodes that have influenced the Federal Reserve as we know it today. Times have changed, economic theories have developed, and the Federal Reserve has adapted to meet new demands. In fact, over the course of its 100 years, the Federal Reserve has proved not only a willingness to change, but also an appetite for embracing and initiating change when necessary to carry out our mission. The Federal Reserve was founded in 1913 in response to a severe banking crisis in 1907. Policymakers of the era believed that a central bank should be created to calm financial panics, supervise banks, and provide a stable currency. Those responsibilities largely endure, but many details have been refined and others added to reflect the growing complexity of the financial system in which the Federal Reserve operates. The evolution has occurred within the framework of evolving public expectations of what a central bank can and should do. From a focus on financial stability to an explicit objective for inflation?the Federal Reserve's recent actions are rooted in history. We cannot hope to understand modern-day Federal Reserve policies without this context. The principles that guide current policies originated in lessons from the Great Depression, from stagflation in the 1970s, and from the savings and loan crisis of the 1980s, among others. I think it is safe to say we are still absorbing many lessons from the financial crisis of 2008, even as we incorporate wisdom gained in previous crises into our immediate response to this most recent episode.