What exactly is the Federal Reserve System?
The Federal Reserve System (FRS) is the U.S. central bank. Perhaps the world’s most prominent financial institution is the Fed. It was created to offer a safe, flexible, and stable financial system for the nation. Twelve Federal Reserve banks operate as districts with their presidents and a seven-member board.
Discovering the Federal Reserve System (FRS)
Central banks have extraordinary power over money and credit generation and distribution for a nation, union, or set of countries. The central bank sets monetary policy and regulates member banks in contemporary economies. The Fed has 12 regional Federal Reserve Banks that serve various U.S. regions.
In reaction to the 1907 financial panic, President Woodrow Wilson signed the Federal Reserve Act on December 23, 1913, creating the Fed. The U.S. was the only significant economic power without a central bank before then. Repeated financial panics in the U.S. throughout the last century caused bank failures and corporate bankruptcies, prompting its development. An institution to avoid alarms and disturbances was called for after a 1907 crisis.
The Fed is the chief supervisor of Federal Reserve System banks and has considerable jurisdiction to guarantee financial stability. It is member institutions’ last resort lender. The Fed has a “dual mandate” of price stability and maximum employment.
The 12 regional Federal Banks are in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
Federal Reserve System’s Role
The Federal Reserve seeks stable prices and maximum sustainable employment through monetary policy.
Four categories describe the Fed’s duties:
- Managing U.S. monetary and credit conditions to maximize employment, stable prices, and moderate long-term interest rates
- Supervising and regulating banks to preserve customers’ credit rights and the U.S. banking and financial system.
- Controlling financial system risk and stability
- Financial services include managing the national payments system, depository banks, the U.S. government, and foreign official institutions.
Federal Reserve System organizational structure
The Board of Governors has seven members. The President nominates, and the Senate confirms these people. No governor can serve more than 14 years. Two years separate their appointments to prevent political influence when political parties compete for funding during elections.
Appointments must also represent all main U.S. economic sectors by statute.
There may be an unfilled board seat, but as of October 2023, all are filled.
|Fed Governors (as of October 2023)|
|Chair||Jerome H. Powell|
|Vice Chair||Philip N. Jefferson|
|Vice Chair of Supervision||Michael S. Barr|
|Board Member||Michelle W. Bowman|
|Board Member||Lisa D. Cook|
|Board Member||Adriana D. Kugler|
|Board Member||Christopher J. Waller|
Each of the 12 regional banks has a president and Fed board governors. Each bank is in a distinct Federal Reserve district.
|Fed Regional Bank Presidents (as of October 2023)|
|Name of President||Bank Location-District|
|Susan M. Collins||Boston-1|
|John C. Williams||New York-2|
|Patrick T. Harker||Philadelphia-3|
|Loretta J. Mester||Cleveland-4|
|Thomas I. Barkin||Richmond-5|
|Raphael W. Bostic||Atlanta-6|
|Kathleen O’Neill Paese||St. Louis-8|
|Jeffrey R. Schmid||Kansas City-10|
|Lorie K. Logan||Dallas-11|
|Mary C. Daly||San Francisco-12|
Federal Reserve System Independence
Central bank independence relates to whether monetary policymakers should be independent of the government. Independence supporters understand that politics may affect monetary policy, which benefits re-election but harms the economy. Some critics believe the central bank and government should closely coordinate their actions and regulate central banks.
The Fed is independent because the President and other government officials do not have to approve its decisions. It must adhere to the monetary and fiscal policy objectives of the government and be under Congress’s control.
The Federal Reserve System (FRS) vs. the Federal Open Market Committee (FOMC)
The Federal Reserve System includes the Board of Governors, Federal Reserve Banks, Federal Open Market Committee, and other Fed initiatives designed to fulfill its dual purpose.
The FOMC sets Federal Reserve monetary policy. Open market operations involve purchasing and selling government securities to affect banks’ reserve levels.
The FOMC contains the Board of Governors, or Federal Reserve Board (FRB), the President of the Federal Reserve Bank of New York, and four rotating regional Federal Reserve Bank presidents.
The committee makes monetary policy choices to maximize employment, stabilize prices, and moderate long-term interest rates.
Interest on U.S. government securities bought through open market operations is the Fed’s principal source of income. Interest on foreign currency assets, loans to depository institutions, and fees for services like check clearing and cash transfers are other revenue streams. The Fed sends its remaining earnings to the Treasury after costs.
The Fedwire transfers trillions of dollars between U.S. institutions every day. Transactions settle the same day. After the 2008 financial crisis, the Fed has focused on the danger of the time lag between early-morning payments and settlement and reconciliation. Large financial institutions are under pressure from the Fed to enhance real-time payment and credit risk monitoring, which was previously only accessible overnight.
FedNow, the Fed’s payment system, replaces slower settlement procedures. July 2023 saw FedNow’s debut.
The Fed Is a Central Bank—What Does That Mean?
Central banks manage a nation’s monetary system and policies. Central banks monitor economic development, control the money supply, and set interest rates to affect price stability and employment.
Federal Reserve ownership: who?
No one owns the Fed. The Federal Reserve Act established it as the nation’s central bank in 1913. Congress has direct oversight over the federal Board of Governors.
Does the Fed print dollars?
The BOP prints currency. The Federal Reserve regulates the money supply using monetary policy. You may also hear that the Fed “prints” money. This is false—depository institutions and lenders “print” fractional reserve money.
The Fed sets interest rates. How?
The Federal Reserve rates its Overnight Reverse Repurchase (ON RREP) Agreement Facility, where it buys and sells assets. This rate determines the rate range. Interest on Reserve Balances (IORB) helps establish the range’s top figure. The Fed also utilizes its discount window and open market operations to set interest rates, leading to 2% long-term inflation.
Does the Fed tax?
Only monetary policy and banking system monitoring are Fed responsibilities. As part of fiscal policy, Congress authorizes and collects federal taxes through the IRS. Individual states or municipalities collect state and local taxes.
The Bottom Line
The Fed is the U.S. central bank. The Fed sets interest rates and regulates the money supply to achieve price stability and maximum employment.
- The U.S. central bank and monetary authority are the Federal Reserve System.
- The Fed ensures a secure, adaptable, and stable financial system.
- The Federal Reserve System has a seven-member board, 12 regional banks, and the Federal Open Market Committee.
- National monetary policy, bank supervision and regulation, financial stability, and banking services are the Fed’s primary functions.
- The Federal Open Market Committee sets monetary policy and controls the money supply.