Federal Reserve System - FRS

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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.