What's the Fed?
Updated: Jun 14
There's been a spotlight on the Federal Reserve these past many months as they toe a delicate line of managing inflation and recession. We hear about the increase in interest rates, but aside from the media update, how much do you know about the Federal Reserve?
The Federal Reserve, usually just referred to as the Fed, is the central banking system in the United States of America. As a central bank, the Fed is given privileged control of the production and distribution of money and credit. They also formulate monetary policies and regulations of member banks (not all commercial banks are member banks with the Federal Reserve). The overall mission of the Fed is to provide our country with a stable, safe, flexible financial system.
The Fed was established after several repeated financial panics, which led to severe economic disruptions due, in part, to business bankruptcies and overall bank failures. The majority of bankers felt the problem stemmed from our country's lack of a central bank. They believed having a central bank would provide more stability as well as having emergency credit for times of financial crisis. On December 23, 1913 President Woodrow Wilson signed the Federal Reserve Act into law establishing the U.S. central bank.
The Fed has undergone several modifications over the many years in order to adapt to the ever changing demands of our evolving economy. Today the Fed is made up of 3 key entities.
The Board of Governors
The Board of Governors is located in Washington, D.C. and is the governing body of the Federal Reserve System. There are seven “governors,” each nominated by the President of the United States, and then confirmed by the U.S. Senate. Each governor is appointed to serve 14 years. Their responsibilities include setting reserve requirements (the amount banks are required to hold in order to meet sudden withdrawals), setting the discount rates (the interest rate the Fed charges on loans due to financial institutions and other banks), overseeing the operations of the 12 Reserve Banks, and guiding the operation of the Federal Reserve System.
Federal Reserve Banks
There are 12 Federal Reserve Banks; each bank has its own president and district. The bank president is responsible for all the Reserve Bank activities. These banks act as the operating arms of the Federal Reserve. Each of the Reserve banks collect data and information about the businesses and needs of the local communities within its region. That information is used when making monetary and policy decisions.
The Federal Open Market Committee
The Federal Open Market Committee (FOMC) is the Fed’s principal body and sets national monetary policy. They also make all the decisions regarding the conduct of open market operations, including the buying and selling of government securities, which affect the federal funds rate. This third entity is made up of parts from the first two, seven members of the Board of Governors and the president of the Federal Reserve Bank of New York, and 4 of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The Committee is also responsible for monetary policy decisions in three areas: Maximizing employment, stabilizing prices, and moderating long term interest rate.
The Federal Reserve plays a major role in the U.S. Economy; understanding how it operates can help you better understand our country's broader economic policies and the impact they have on you and your community.
Photo by Alex Bierwagen