In: Economics
The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.The Federal Reserve has three primary functions: Monetary Policy, Banking Supervision, Financial Services
Board of Governors
The Board of Governors, located in Washington, D.C., provides
the leadership for the System.
The Board of Governors, also known as the Federal Reserve Board, is
the national component of the Federal Reserve System. The board
consists of the seven governors, appointed by the president and
confirmed by the Senate. Governors serve 14-year, staggered terms
to ensure stability and continuity over time. The chairman and
vice-chairman are appointed to four-year terms and may be
reappointed subject to term limitations.
Among the responsibilities of the Board of Governors are to guide
monetary policy action, to analyze domestic and international
economic and financial conditions, and to lead committees that
study current issues, such as consumer banking laws and electronic
commerce.
The Board also exercises broad supervisory control over the
financial services industry, administers certain consumer
protection regulations, and oversees the nation's payments system.
The Board oversees the activities of Reserve Banks, approving the
appointments of their presidents and some members of their boards
of directors. The Board sets reserve requirements for depository
institutions and approves changes in discount rates recommended by
Reserve Banks.
The Board's most important responsibility is participating in the
Federal Open Market Committee (FOMC), which conducts our nation's
monetary policy; the seven governors comprise the voting majority
of the FOMC with the other five votes coming from Reserve Bank
presidents.
Board members are called to testify before Congress, and they
maintain regular contact with other government organizations as
well. The chairman reports twice a year to Congress on the Fed's
monetary policy objectives, testifies on numerous other issues, and
meets periodically with the Secretary of the Treasury.
The Board funds its operations by assessing the Federal Reserve
Banks rather than through Congressional appropriation. Its
financial accounts are audited annually by a public accounting
firm, and these accounts are also subject to audit by the General
Accounting Office.
Federal Reserve Banks
A network of 12 Federal Reserve Banks and 24 branches make up the Federal Reserve System under the general oversight of the Board of Governors. Reserve Banks are the operating arms of the central bank.Each of the 12 Reserve Banks serves its region of the country, and all but three have other offices within their Districts to help provide services to depository institutions and the public. The Banks are named after the locations of their headquarters - Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.The Reserve Banks serve banks, the U.S. Treasury, and, indirectly, the public. A Reserve Bank is often called a "banker's bank," storing currency and coin, and processing checks and electronic payments. Reserve Banks also supervise commercial banks in their regions. As the bank for the U.S. government, Reserve Banks handle the Treasury's payments, sell government securities and assist with the Treasury's cash management and investment activities. Reserve Banks conduct research on regional, national and international economic issues. Research plays a critical role in bringing broad economic perspectives to the national policymaking arena and supports Reserve Bank presidents who all attend meetings of the Federal Open Market Committee (FOMC).
Each Reserve Bank's board of directors oversees the management and activities of the District bank. Reflecting the diverse interests of each District, these directors contribute local business experience, community involvement and leadership. The board imparts a private-sector perspective to the Reserve Bank. Each board appoints the president and first vice president of the Reserve Bank, subject to the approval of the Board of Governors.
All member banks hold stock in Reserve Banks and receive dividends. Unlike stockholders in a public company, banks cannot sell or trade their Fed stock. Reserve Banks interact directly with banks in their Districts through examinations and financial services and bring important regional perspectives that help the entire Federal Reserve System do its job more effectively.
Member Banks
Approximately 38 percent of the 8,039 commercial banks in the United States are members of the Federal Reserve System. National banks must be members; state-chartered banks may join if they meet certain requirements. The member banks are stockholders of the Reserve Bank in their District and as such, are required to hold 3 percent of their capital as stock in their Reserve Banks.
Other Depository Institutions
In addition to the approximately 3,000 member banks, about 17,000 other depository institutions provide the American people checkable deposits and other banking services. These depository institutions include nonmember commercial banks, savings banks, savings and loan associations, and credit unions. Although not formally part of the Federal Reserve System, these institutions are subject to System regulations, including reserve requirements, and have access to System payments services.
Federal Open Market Committee
Federal Open Market Committee, or FOMC, is the Fed's monetary policymaking body. It is responsible for formulation of a policy designed to promote stable prices and economic growth. Simply put, the FOMC manages the nation's money supply.
The voting members of the FOMC are the Board of Governors, the
president of the Federal Reserve Bank of New York and presidents of
four other Reserve Banks, who serve on a rotating basis. All
Reserve Bank presidents participate in FOMC policy discussions. The
chairman of the Board of Governors chairs the FOMC.
The FOMC typically meets eight times a year in Washington, D.C. At
each meeting, the committee discusses the outlook for the U.S.
economy and monetary policy options.
The FOMC is an example of the interdependence built into the Fed's
structure. It combines the expertise of the Board of Governors and
the 12 Reserve Banks. Regional input from Reserve Bank directors
and advisory groups brings the private sector perspective to the
FOMC and provides grassroots input for monetary policy
decisions.
Advisory Councils
Three statutory advisory councils - the Federal Advisory Council, the Consumer Advisory Council, and the Thrift Institutions Advisory Council - advise the Board on matters of current interest. These councils, whose members are drawn from each of the 12 Federal Reserve Districts, meet two to four times a year. The individual Reserve Banks have advisory committees as well, including thrift institutions advisory committees, small business and agricultural advisory committees. Moreover, officials from all Reserve Banks meet periodically in various committees