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 Reserve Bank

    The central bank of the United States and the most powerful financial ...
  2. Federal Reserve Board - FRB

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

    The central bank of the United States. The Fed, as it is commonly ...
  4. Federal Reserve Credit

    Refers to the process of the Federal Reserve lending funds on ...
  5. Board of Governors

    A board of governors is a several-member group that oversees ...
  6. 1913 Federal Reserve Act

    The 1913 U.S. legislation that created the current Federal Reserve ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. How does the Federal Reserve's set discount rate affect my personal finances?

    Discover how the Federal Reserve implements its chosen monetary policy through its discount rates, and how these actions ... Read Answer >>
  5. 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 >>
  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. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center