What it means
The Second District covers New York State, the northern twelve counties of New Jersey, Fairfield County in Connecticut, Puerto Rico and the US Virgin Islands. The bank sits at the centre of the country's financial markets, which gives it a special role.
It oversees many of the largest banks and trading firms headquartered in its area. Its most important job is carrying out open market operations.
When the Federal Open Market Committee decides to move short-term rates or change the size of the central bank's holdings of securities, the trading desk at the New York bank buys and sells government and related securities to make that happen. The bank also manages the central bank's portfolio of securities.
Its president is the only regional president who always votes on the Federal Open Market Committee, and is traditionally its vice chair. That is because the bank implements the decisions and needs to be close to the process.
The other regional presidents take turns to hold the remaining voting seats. The bank offers services to foreign central banks and international organisations, including holding gold and securities on their behalf.
It also takes part in payments services, such as those that move money between banks. For businesses, these roles matter because they keep the dollar system stable, and the bank publishes research on credit, household debt and inflation expectations that analysts follow.
A nuance is that the bank is not a commercial bank for the public or for companies. A business cannot open an account there, and it is separate from the New York Stock Exchange and from the large commercial banks that share its city.
Confusing it with those institutions is a frequent error. The bank also supervises the large banks and holding companies headquartered in its district, and it hosts a number of programmes on markets and financial stability.
During periods of market stress, it has been the place where emergency lending facilities are run on behalf of the whole central bank. Finance teams that operate in the capital markets therefore watch its announcements closely.
In practice
Real-world examples.
Example
A corporate treasurer reads that the Federal Open Market Committee has asked the New York bank's trading desk to buy more government bonds. She expects bond yields to fall and decides to issue a $30,000,000 bond sooner rather than later. The finance team brings forward its board approval by a month and asks its bankers to prepare the documents earlier than planned.
Example
A foreign central bank keeps part of its reserves in gold and securities at the New York bank. When it wants to settle a trade, it asks the bank to move the holdings between accounts rather than shipping the metal. The bank's staff record the transfer in the ledger, and the central bank sees no physical movement of the metal at all.
Example
An analyst at an asset manager follows the New York bank's survey of consumer expectations. The survey shows rising expectations for inflation over the next year. She adjusts her forecast for rates and recommends shortening the duration of the company's bond portfolio. Her note to the investment committee explains the survey, the change in expectations and the reason for the decision.
Case study
Seen in the real world.
Eastgate Treasury Services is an illustrative, fictional firm that manages cash for mid-sized companies. Its head of research notices that bond yields often move several days before official announcements about the central bank's balance sheet.
She studies the public statements from the New York bank describing its planned trading operations and compares them with market moves. The statements explain how many securities the trading desk will buy or sell and over what period.
Using this information, she advises clients to extend the maturity of $15,000,000 of investments ahead of expected purchases, which earns an extra 0.20% in this illustrative case, or $30,000 a year. The lesson is that understanding how the central bank carries out policy, not only what it decides, is useful for managing cash. Her clients also receive a short note after each announcement that explains what has changed and what it means for them.
Watch out
Common mistakes.
- Thinking the New York bank sets interest rates alone, when the decisions are made by the Federal Open Market Committee.
- Assuming the bank is a place where companies can deposit funds, when it deals mainly with banks, the government and foreign central banks.
- Confusing it with the New York Stock Exchange, when the two are separate institutions.
Questions
People also ask.
Which area does it serve?
It serves New York State, northern New Jersey, Fairfield County in Connecticut, Puerto Rico and the US Virgin Islands.
Why does its president always vote?
The bank carries out the committee's market operations, so its president has a permanent seat.
What are open market operations?
They are purchases and sales of securities by the central bank to influence short-term interest rates and the supply of money.
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