The Federal Reserve System is the central banking system of the United States and was created in 1913 with the enactment of the Federal Reserve Act. Over the past century, its roles and duties have expanded.
What’s the Purpose of the Federal Reserve System?
The Federal Reserve System controls the money supply. The system is designed to establish monetary policy; supervise and regulate bank institutions; maintain the stability of the financial system and contain systemic risk; and provide financial services to depository institutions, the U.S. government, and foreign official institutions.
In setting monetary policy, the Federal Reserve System has three key objectives to influence money and credit. The objectives are: maximum employment, stable prices, and moderate long-term interest rates. Maintaining maximum employment and stable prices are referred to as the Federal Reserve’s dual mandate.
In addition, supervising and regulating banks and other important financial institutions to ensure safety and soundness of our nation’s banking and financial system while protecting the rights of consumers is a function of the Federal Reserve System.
How is the Federal Reserve System Structured?
The Federal Reserve System is a private corporation which has oversight from a governmental agency. It is a private central bank that makes its own policies and loans currency at interest to the government.
The Federal Reserve System is structured in two-parts which provide leadership for the system:
- A central authority called the Board of Governors located in Washington, D.C.,
- A decentralized network of 12 Federal Reserve Banks located throughout the country.
The Board of Governors is also known as the Federal Reserve Board and constitutes an independent governmental agency charged with overseeing the Federal Reserve System. The Board consists of seven governors appointed by the President and confirmed by the Senate.
Governors serve staggered fourteen-year terms to ensure stability and continuity and shield them from political pressure. The Chairman and Vice Chairman of the Board are appointed to four year terms and may be reappointed.
The operations of the Board are funded by assessing the Federal Reserve Banks rather than through congressional appropriations.
The decentralized network of Reserve Banks are non-governmental organizations and operate in the public interest. The system is comprised of 12 regional Reserve Banks (also known as District Banks) and twenty-five branches operating under the general oversight of the Board of Governors. Each of the 12 Reserve Banks serve a region of the country providing services to depository institutions and the public.
The twelve regional banks headquarters are located in:
- New York
- St Louis
- Kansas City
- San Francisco
Much like corporations, the Reserve Banks and its branches have a board of directors composed of representatives of commercial banks that are members of the Federal Reserve System, as well as individuals representing business interests of each District. Sometimes, boards also include members from the labor, consumer, and nonprofit sectors.
Each Bank president is appointed by its board of directors and approved by the Board of Governors, also intended to safeguard against political influence.
The Reserve Banks conduct much of the day-to-day operations of the Federal Reserve System.
In 1930 an amendment to the Federal Reserve Act created the Federal Open Market Committee (FOMC), which includes members of the Board of Governors and presidents of the Reserve Banks. The FOMC is the monetary policymaking body.
The FOMC has 12 voting members which include the seven members of the Board of Governors and 5 Reserve Bank presidents. The 5 Reserve Bank president spots are filled by the president of the Federal Reserve Bank of New York (who has permanent voting privileges) and 4 of the 11 Reserve Bank presidents who serve one-year terms as voting members on a rotating basis. All 12 presidents participate in the FOMC meetings regardless of whether or not they are current voting members.
Voting membership changes at the first scheduled meeting of the year. For 2014, the following regional Reserve Bank presidents hold a voting position: Dallas, Minneapolis, Cleveland, and Philadelphia.
The FOMC holds eight meetings in Washington, D.C. each year however it is only required to meet four times per year. Financial conditions and economic stability are reviewed at the two-day meetings. On the final day of each meeting, voting members decide monetary policy and the FOMC issues a written policy statement that summarizes the Committee’s assessment of economic conditions, its economic outlook, and the policy decision at that meeting.
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