Federal Reserve System - Explained
What is the Federal Reserve System?
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Table of ContentsWhat is the Federal Reserve System? How Does the Federal Reserve System Work?Components of the Federal Reserve SystemThe Board of GovernorsFederal Reserve BanksMember BanksFederal Open Market Committee (FOMC) Advisory Councils
What is the Federal Reserve System?
The Federal Reserve System (FRS), variously referred to as the Federal Reserve or the Fed, is the central banking authority in the United States of America that is responsible for regulating the monetary and financial system in the country. The Fed was formed by the passing of the Reserve Act on Dec. 23, 1913 by President Woodrow Wilson, and comprises a federal agency in Washington, D.C., the Board of Governors, and 12 regional Federal Reserve Banks in major cities across the USA.
How Does the Federal Reserve System Work?
The Federal Reserve System came into being as a result of an initiative by the U.S. Congress to present to the nation a secure, flexible, and stable monetary and financial system. The Federal Reserve Systems current responsibilities can be broadly classified into four categories: 1) Administering the monetary policy of the United States by shaping money and credit conditions in the economy in the quest for full employment and stable prices. 2) Managing and regulating banks and various other major financial institutions in order to guarantee the safety and wellbeing of the American banking and financial system, while safeguarding the credit rights of customers. 3) Preserving the stability of the financial system and restraining systemic risk that is common in financial markets. 4) Offering specific financial services to the government of the United States, in addition to several U.S. financial institutions, and foreign official institutions. The Fed also plays a significant role in running and supervising the payments systems of the United States.
Components of the Federal Reserve System
The Board of Governors
The Board of Governors, also known as the Federal Reserve Board, is stationed in in Washington, D.C and is the core leadership body of the Federal Reserve System. It is the national component of the Federal Reserve System and consists of seven governors appointed by the President of the United States and confirmed by the Senate. Whereas both the Chairman as well as the Vice-chairman are appointed to four-year terms, the governors enjoy 14-year staggered terms.
Federal Reserve Banks
The Federal Reserve System comprises a total of 12 Federal Reserve Banks as well as 24 branches. These banks as well as their branches operate under the purview of the Board of Governors. The Federal Reserve Banks are located at the following cities:
- New York
- St. Louis
- Kansas City
- San Francisco
The Federal Reserve System boasts membership of almost 40% of the 8000+ commercial banks registered in the United States. While it is mandatory for national banks to be members of the FRS, state-chartered banks may seek membership as long as they satisfy specific requirements.
Federal Open Market Committee (FOMC)
The FOMC is the body responsible for formulating the monetary policies of the Federal Reserve System. The key consideration during policy formulation is to promote stable prices as well as economic growth.
There are three statutory advisory councils that advise the Board on matters of current interest. These are:
- The Federal Advisory Council
- The Consumer Advisory Council
- The Thrift Institutions Advisory Council
These three councils boast members drawn from each of the 12 Federal Reserve Districts.