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 unstable and the public had very little faith in the banking system. The Fed is an independent entity, but is subject to oversight from Congress. Basically, this means that decisions do not have to be ratified by the President or anyone else in the government, but Congress periodically reviews the Fed's activities.
The Fed is headed by a government agency in Washington known as the Board of Governors of the Federal Reserve. The Board of Governors consists of seven presidential appointees, each of whom serves 14 year terms. All members must be confirmed by the Senate and can be reappointed. The board is led by a chairman and a vice chairman, each appointed by the President and approved by the Senate for four-year terms. The current chair is Janet Yellen, who took over for Ben Bernanke on February 3, 2014.
There are 12 regional Federal Reserve Banks located in major cities around the country that operate under the supervision of the Board of Governors. Reserve Banks act as the operating arm of the central bank and do most of the work of the Fed. The banks generate their own income from four main sources:
- Services provided to banks
- Interest earned on government securities acquired while carrying out the work of the Federal Reserve
- Income from foreign currency held
- Interest on loans to depository institutions
The income gathered from these activities is used to finance day to day operations, including information gathering and economic research. Any excess income is funneled back into the U.S. Treasury.
The system also includes the Federal Open Market Committee, better known as the FOMC. This is the policy-making branch of the Federal Reserve. Traditionally, the chair of the board is also selected as the chair of the FOMC. The voting members of the FOMC are the seven members of 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 one-year rotating basis. All Reserve Bank presidents participate in FOMC policy discussions whether they are voting members or not. The FOMC makes the important decisions on interest rates and other monetary policies. This is the reason why they get most of the attention in the media. We'll talk about the FOMC in detail later.
Finally, all national banks and some state-chartered banks are part of the Federal Reserve System. They are referred to as member banks.
The Federal Reserve: Duties
InvestingLearn about the duties and responsibilities of the chairman of the Federal Reserve Board, including testifying before Congress and as chair of the FOMC.
InsightsWe all know that the Federal Reserve utilizes monetary policy to control the economy, but what do the 12 regional Federal Reserve Banks do?
InvestingLearn why the bond market may not necessarily see an interest rate increase soon. Read about how the Federal Reserve will slowly raise interest rates.
InsightsAn overview of the independent status of the Federal Reserve and arguments for and against it.
Personal FinanceThe federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements.
TradingAvoid unpleasant surprises by paying attention to economic data relied upon by the Federal Open Market Committee (FOMC) when making decisions on monetary policy.
Personal FinanceThere is an internal dispute within the Fed on whether rates should be increased or remain unchanged.