The Federal Reserve: The Central Bank of the United States
As the central bank of the United States, the Federal Reserve supports the effective operation of the US economy, acting in the public interest to promote the stability of the financial system. It performs five general functions:
- Conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates
- Promotes the stability of the financial system and seeks to minimize and contain systemic risks
- Helps to ensure the safety and soundness of individual financial institutions and monitors their impact on the financial system
- Fosters payment and settlement system safety and efficiency through services to the banking industry and the US government
- Supports consumer protection and community development through consumer-focused supervision and examination and through research and analysis of emerging consumer issues and trends and community economic development activities
Unique Structure of the Federal Reserve
Created by the Federal Reserve Act, the Federal Reserve System was established as the nation’s central bank in December 1913. To keep the institution insulated from short-term political pressures, it was made an independent entity within government.
The Reserve Banks
The 12 Reserve Banks, one per geographically determined District, along with their branches help to ensure that regional interests are represented in national monetary policy decisions. Each Bank has its own president and board of directors and functions independently of the other 11 Banks, each with oversight from the Board of Governors. Some but not all Reserve Banks have branches, and each branch has its own branch board of directors in addition to the Bank’s main board.
Board of Governors
The Board of Governors, headquartered in Washington DC, is a federal government agency. The Board comprises seven members who are appointed by the President of the United States and confirmed by the Senate. The full term of a Board member is 14 years; after serving a full term, a Board member may not be reappointed. If a member leaves the Board before his or her term expires, however, the person appointed and confirmed to serve the remainder of the term may later be reappointed to a full 14-year term.
The Chairman and the Vice Chairman of the Board, both of whom serve four-year terms, are also appointed by the President and confirmed by the Senate. Nominees to these posts must be members of or be simultaneously appointed to the Board.
Federal Open Market Committee (FOMC)
When the Federal Reserve structure of 12 regional Banks and the Board of Governors was first conceived, variation was expected among discount rates, or the interest rate that commercial banks are charged for borrowing funds from a Reserve Bank. Setting a separately determined discount rate appropriate to each District was at that time an important tool of monetary policy. As the nation’s economy grew in complexity, however, the effective conduct of monetary policy began to require increased collaboration and coordination throughout the System. This was accomplished in part through the creation of the Federal Open Market Committee (FOMC).
The FOMC includes the seven members of the Board of Governors, the president of the New York Fed, and four other Reserve Bank presidents who serve one-year terms on a rotating basis. The FOMC oversees open market operations, the main tool used by the Federal Reserve to influence overall monetary and credit conditions. The Fed’s instrument for implementing monetary policy is the FOMC’s target for the federal funds rate—the interest rate at which banks lend to each other overnight. By buying and selling US government securities in the open market, the Fed influences the federal funds rate. Movements in this rate and expectations about those changes influence all other interest rates and asset prices in the economy.
Formal meetings of the FOMC are held eight times per year, and additional meetings are held on an as-needed basis.
For more information on the Federal Reserve System and the Board of Governors, please see federalreserve.gov/aboutthefed. More info on the Federal Open Market Committee can be found at federalreserve.gov/monetarypolicy/fomc.