THE FEDERAL RESERVE SYSTEM

The Federal Reserve System, often referred to as the Federal Reserve or simply the Fed, is the central bank of the United States. It was founded by Congress in 1913 by "The Federal Reserve Act" to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded. It is important to take into account that despite being a part of the executive branch the FED is not under the direct control of the President.

Today, the Federal Reserve’s duties fall into four general areas:

  1. conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates;

   2. supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers;

        3. maintaining the stability of the financial system;

       4. providing financial services to depository institutions, the US government, and foreign official institutions, including playing a major role in operating the nation’s payments system.

The Fed consists of:

·        the Board of Governors

·        the Federal Open Market Committee

·        12 regional Federal Reserve Banks

·        Numerous private US member banks

·        Advisory Councils

The Board of Governors, also known as the Federal Reserve Board, located in Washington DC, is the main governing body of the Federal Reserve System. It is charged with overseeing the 12 District Reserve Banks and with helping to implement national monetary policy. The Board consists of seven governors, appointed by the President of the United States and confirmed by the Senate for 14-year terms. The Chairman and Vice Chairman of the Board are appointed for four-year terms.

The Federal Open Market Committee (FOMC) is composed of the seven members of the Board of Governors and five Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves on a continuous basis; the presidents of the other Reserve Banks serve one-year terms on a rotating basis. The FOMC is the most important monetary policymaking body of the Federal Reserve System. It is charged under law with overseeing open market operations, the principal tool of national monetary policy. These operations affect the amount of Federal Reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions. The FOMC also directs operations undertaken by the Federal Reserve in foreign exchange markets.

To carry out the day–to–day operations of the Federal Reserve System, the United States has been divided into twelve Federal Reserve Districts with a Reserve Bank in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Twelve district Federal Reserve Banks with 25 branches serve as the operating arms of the nation's central banking system. Many of the services provided by Reserve Banks to depository institutions and the government are similar to services provided by banks and thrift institutions to business customers and individuals. Reserve Banks hold the cash reserves of depository institutions and make loans to them. They move currency and coin into and out of circulation, and collect and process millions of checks each day. They provide checking accounts for the Treasury, issue and redeem government securities, and act in other ways as а fiscal agent for the US government. They supervise and examine member banks for safety and soundness. The Reserve Banks also participate in the activity that is the primary responsibility of the Federal Reserve System, the setting of monetary policy. As required by the Federal Reserve Act of 1913, each of the Reserve Banks is supervised by a board of nine directors who are familiar with economic and credit conditions in the district.

Numerous private US member banks. National banks, chartered by the federal government must be members of the Federal Reserve System; state-chartered banks may join if they meet certain requirements. The member banks are stockholders of the Reserve Bank in their District and as such, are required to hold 3 percent of their capital as stock in their Reserve Banks. Holding stock in a Federal Reserve Bank is not, however, like owning publicly traded stock. The stock cannot be sold or traded. Member banks receive a fixed, 6 percent dividend annually on their stock, and they do not directly control the applicable Federal Reserve Bank as a result of owning this stock. They do, however, elect six of the nine members of Reserve banks’ boards of directors.

Three Advisory Councils: the Federal Advisory Council, the Consumer Advisory Council, and the Thrift Institutions Advisory Council advise the Board on matters of current interest. These councils, whose members are drawn from each of the 12 Federal Reserve Districts, meet two to four times a year. 

The Twelve Federal Reserve Districts: