Federal Reserve System - FRS

Loading the player...

What is the 'Federal Reserve System - FRS'

The Federal Reserve System (FRS) is the central bank of the United States. The Fed, as it is commonly known, regulates the U.S. monetary and financial system. The Federal Reserve System is composed of a central governmental agency in Washington, DC, the Board of Governors and 12 regional Federal Reserve Banks in major cities throughout the United States.

BREAKING DOWN 'Federal Reserve System - FRS'

The Federal Reserve's duties can be divided into four general areas: conducting monetary policy, regulating banking institutions and protecting the credit rights of consumers, maintaining the stability of the financial system, and providing financial services to the U.S. government. The Fed also operates three wholesale payment systems: the Fedwire Funds Service, the Fedwire Securities Service and the National Settlement Service.

The Fed is a major force in the economy and banking.

Role and Authority

The Fed was established by the Federal Reserve Act, which was signed by President Woodrow Wilson on Dec. 23, 1913 in response to the financial panic of 1907. Before that, the United States was the only major financial power without a central bank. The Fed has broad power to act to ensure financial stability, and it is the primary regulator of banks that are members of the Federal Reserve System. It acts as the lender of last resort to member institutions who have no place else to borrow.

Banks in the United States are also subject to regulations established by the states, the Federal Deposit Insurance Corporation (if they are members) and the Office of the Comptroller of the Currency (OCC).

FOMC Sets Monetary Policy

The Federal Open Market Committee (FOMC) is the monetary policy-making part of the Fed. It's comprised of the seven members of the board of governors of the Fed, the president of the New York Fed and four of the remaining 11 regional Fed presidents, who serve one-year terms on a rotating basis. The FOMC meets eight times a year on a regularly scheduled basis and additionally on an as-needed basis.

The FOMC adjusts the target for the overnight Fed Funds rate at its meetings based on its view of the strength of the economy. When it wants to stimulate the economy, it reduces the target rate. Conversely, it raises the Fed Funds rate to slow the economy. On Dec. 15, 2015, the Fed raised the target rate to a range of 0.25 to 0.5%. This was the first rate hike in almost 10 years.

Fed Payments System

The Federal Reserve payments system, commonly known as the Fedwire, moves trillions of dollars daily between banks throughout the United States. Transactions are for same-day settlement. In the aftermath of the 2008 financial crisis, the Fed has paid increased attention to the risk created by the time lag between when payments are made early in the day and when they are settled and reconciled. Large financial institutions are being pressured by the Fed to improve real-time monitoring of payments and credit risk, which has been available only on an end-of-day basis.

RELATED TERMS
  1. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  2. 1913 Federal Reserve Act

    The 1913 U.S. legislation that created the current Federal Reserve ...
  3. Central Bank

    The entity responsible for overseeing the monetary system for ...
  4. Division Of Reserve Bank Operations ...

    An entity under the Federal Reserve System that manages certain ...
  5. Federal Reserve Communications ...

    A communication network established in 1981 in an effort to update ...
  6. Regulation I

    A regulation set forth by the Federal Reserve. Regulation I stipulates ...
Related Articles
  1. Economics

    Explaining the Federal Reserve System

    The Federal Reserve System is the central bank of the United States. It regulates monetary policy and supervises the nation’s banking system.
  2. Economics

    Regional Banks Give The Fed A National Perspective

    We all know that the Federal Reserve utilizes monetary policy to control the economy, but what do the 12 regional Federal Reserve Banks do?
  3. Personal Finance

    The Banking System: Federal Reserve System

    ByStephen D. Simpson, CFA The central bank of the United States is the Federal Reserve System. The Federal Reserve System came into being in 1913, after the passage of the Federal Reserve Act ...
  4. Economics

    What's the 1913 Federal Reserve Act?

    The 1913 Federal Reserve Act was a pivotal congressional act that helped establish the Federal Reserve System as it exists today. It is one of the United States financial system’s most influential ...
  5. Economics

    What Does a Central Bank Do?

    A central bank oversees a nation’s monetary system.
  6. Economics

    The Federal Reserve: What Is The Fed?

    The Federal Reserve was created by the U.S. Congress in 1913. Before that, the U.S. lacked any formal organization for studying and implementing monetary policy. Consequently markets were often ...
  7. Economics

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  8. Personal Finance

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  9. Economics

    The Federal Reserve: Monetary Policy

    The term monetary policy refers to the actions that the Federal Reserve undertakes to influence the amount of money and credit in the U.S. economy. Changes to the amount of money and credit affect ...
  10. Professionals

    Monetary Policy

    FINRA Series 6 Exam Study Guide - Monetary Policy. In this section, Monetary policy tools, money supply and interest rates. The role of the federal reserve board in monetary policy.
RELATED FAQS
  1. Who determines the reserve ratio?

    Understand what the Federal Reserve is and what it regulates in the U.S. economy. Learn about the reserve ratio and how the ... Read Answer >>
  2. What is the structure of the U.S. Federal Reserve Bank?

    Wonder how the U.S. Federal Bank began and how it works today? Learn how this complex system is structured and how it works ... Read Answer >>
  3. How is the Federal Reserve audited?

    Learn how the Federal Reserve gets audited. Due to gridlock, the Federal Reserve has been forced to take on the role of stimulating ... Read Answer >>
  4. Why would the Federal Reserve change the reserve ratio?

    Understand the Federal Reserve's monetary policy and the tools it uses to change that monetary policy. Learn about the reserve ... Read Answer >>
  5. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Answer >>
  6. What happens if the Federal Reserve lowers the reserve ratio?

    Learn about the Federal Reserve's monetary policy and the tools it uses to control it. Understand what happens if the Federal ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center