Question

Describe the structure of the Federal Reserve System and the job of each part. Why was the Fed set up like this?

Answer 1

The Federal Reserve System has a two-part structure: a central authority called the Board of Governors headquartered in Washington , D.C., and a decentralized network of 12 Federal Reserve Banks distributed in the United States. One of the most noticeable functions of the Fed is the Federal Open Market Committee (FOMC), which brings together members of the Board of Governors and presidents of the Reserve Banks to determine monetary policy.

The Fed has been set up by Congress to ensure that monetary policy is free from political interference. The Fed 's policies are therefore shielded from intervention by other branches of the federal government. Specifically, legislative and organizational decisions do not require the approval of the Congress or the President. In addition, the Fed 's activities are not funded by Legislative appropriations. The Fed is able to self-fund its budget through interest gained on U.S. government securities owned by it, interest on loans to financial institutions, and fees paid to banks.

Board of Governors- The Board of Governors is based at the heart of the Federal Reserve system in Washington , D.C. The Board is responsible for overseeing the entire Federal Reserve System and functions as an autonomous government entity. The Board shall be composed of seven members nominated by the President and confirmed by the Senate. Members serve staggered 14-year terms which expire in even-numbered years. The long, 14-year terms are another aspect of the Fed 's structure designed to protect members from political pressure. Among these members, the President also appoints a Chairperson and two Vice Chairpersons to serve on the Board for a term of four years.

Federal Reserve Banks- The Fed comprises 12 regional Federal Reserve Banks that control a major part of the system's day-to-day operations. Such reserve banks, also known as district banks, are structured as a special form of non-profit entity working in the public interest. The 12 districts are based in Boston , New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Houston, and San Francisco. Reserve Bank branches are based in 24 other cities.

Federal open market Committee- The Federal Open Market Committee ( FOMC) is the monetary policy-making agency of the Fed. The FOMC has 12 voting members, including all seven members of the Board of Governors and a revolving group of five Presidents of the Reserve Bank. The Chairperson of the Board of Governors also acts as Chairperson of the FOMC. The President of the Federal Reserve Bank of New York is the Vice-Chairman of the FOMC. The NY Fed is actively active in monetary policy activities, and its president has a permanent position on the FOMC. The other 11 Reserve Bank presidents serve as one-year voting members on a rotating basis.