The USA Federal Reserve
The Federal Reserve is made up of three parts: the Board of Governors, the 12 reserve banks, and the Federal Open Market Committee (FOMC). This complex design is tied to how the Fed was created in the first place, about 100 years ago, following the bank failures of the late 1800s and early 1900s. These banking panics created a domino effect that led to widespread economic recessions. When Congress wrote the Federal Reserve Act in 1913, an objective of the Fed was to help banks acquire emergency cash reserves to meet panic withdrawals, establishing confidence in the banking system and stability in the economy. Another goal was to make payments easier and faster. To achieve these goals, the Fed combined central national authority through the Board of Governors with regional independence through the reserve banks, and a third entity, the FOMC, brings together the expertise of the first two in setting the nation's monetary policy.
In Washington, D.C., the Board of Governors, a U.S. government agency, has seven members, called governors, appointed by the U.S. president and confirmed by the U.S. Senate. The governors write regulations to make commercial banks financially sound, study economic trends to help forecast the country's future economic direction, and oversee the 12 reserve banks. A key responsibility is participating on the FOMC, whose meeting room is right next door. The FOMC is the Fed's chief body for monetary policymaking, where the seven governors meet with the presidents of the 12 reserve banks about eight times a year to discuss the current state of the economy and how to promote maximum employment and stable prices. While everyone participates, only the voting members—the seven board governors, the president of the Federal Reserve Bank of New York, and four other reserve bank presidents on a rotating basis—vote on actions. Each FOMC meeting ends with a vote on actions that will affect key interest rates, which then influence consumer and business spending.
There are 12 districts in the Federal Reserve, each served by a regional reserve bank, which have three main responsibilities: providing financial services, contributing to monetary policy, and supervising commercial banks. A reserve bank is often called the "banker's bank" because it provides a safe and efficient method for transferring money; every day, banks deposit billions of dollars at the Fed in cash, checks, or wire transfers. Reserve banks offer payment services to all financial institutions in the United States, including using high-speed machines to sort currency, check for counterfeit bills, and shred old ones. They also transfer money electronically between banks. Besides serving commercial banks, reserve banks also serve as banks for the U.S. government, maintaining accounts for the U.S. Treasury and assisting in issuing and redeeming securities.
To help keep the economy healthy, the Fed conducts monetary policy, a task informed by economists at the reserve banks who are experts on different aspects of our national economy. Despite varying perspectives, most economists agree that the economy performs well when inflation is low and stable, making low inflation a long-term goal of the Fed. The economists' most important job is to prepare their reserve bank president for the FOMC meetings, where members set a target range for the policy interest rate, called the federal funds rate, which is the interest rate on overnight loans between banks. This rate influences other interest rates, like those for mortgage loans. To ensure the federal funds rate stays within the target range, the Fed uses monetary policy tools, such as the interest rate it pays to banks on their reserve balances.
To foster safe, sound, and competitive practices, the Fed both regulates the banking system and supervises certain types of financial institutions. Bank regulation refers to the written rules for financial institutions, handled by the Board of Governors, while supervision is the enforcement of these rules, carried out by staff at the 12 reserve banks. Fed examiners visit commercial banks to evaluate financial statements, asset quality, internal controls, and risk management to ensure the money of depositors is safe and sound. They also review a bank's compliance with federal and state laws, issuing a rating that reflects whether the institution is in good shape or requires corrective action. One of the most important ways the Fed ensures safety is by helping banks respond to crises, such as by making short-term loans through its discount window. This not only helps individual banks but also ensures that a shortage of funds at one institution does not disrupt the entire banking system. In summary, the three main parts of the Fed are the Board of Governors, the FOMC, and the 12 reserve banks, and their three main responsibilities are providing financial services, conducting monetary policy, and supervising banks, all contributing to a healthy economy.
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