The Federal Reserve: What Is The Fed?
  1. The Federal Reserve: Introduction
  2. The Federal Reserve: What Is The Fed?
  3. The Federal Reserve: Duties
  4. The Federal Reserve: Monetary Policy
  5. The Federal Reserve: The FOMC Rate Meeting
  6. The Federal Reserve: Conclusion

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 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

  1. The Federal Reserve: Introduction
  2. The Federal Reserve: What Is The Fed?
  3. The Federal Reserve: Duties
  4. The Federal Reserve: Monetary Policy
  5. The Federal Reserve: The FOMC Rate Meeting
  6. The Federal Reserve: Conclusion
RELATED TERMS
  1. Federal Open Market Committee - FOMC

    The branch of the Federal Reserve Board that determines the direction ...
  2. Federal Reserve Board - FRB

    The governing body of the Federal Reserve System. The seven members ...
  3. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  4. Reservable Deposit

    A bank deposit subject to reserve requirements. Reserve requirements ...
  5. Board of Governors

    A board of governors is a several-member group that oversees ...
  6. Federal Reserve Credit

    Refers to the process of the Federal Reserve lending funds on ...
RELATED FAQS
  1. 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 >>
  2. Who controls the Federal Reserve Bank?

    Read about the ownership and control of the Federal Reserve, the most powerful financial institution in the world and the ... 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. 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 >>
  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 do banks do to control the bank reserve?

    Understand what the Federal Reserve does in order to expand or contract the economy. Learn what depository institutions can ... Read Answer >>

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