The Federal Reserve System is an important part of the United States’ finances. Know the Fact brings some light on what the Federal Reserve System is and its structure.
The definition of the Federal Reserve System
The FRS, or Federal Reserve System, also called the Federal Reserve or simply referred to as the Fed, is the central bank of the United States. The Federal Reserve System is perhaps the most powerful financial institution in the world. It was formed on December 23, 1913, with the passing of the Federal Reserve Act. The reason for the creation of the Federal Reserve System is a series of financial panics that occurred in the past, with special emphasis on the panic of As a result of this situation, the decision was made to centralise control of the US monetary system in order to reduce the financial crisis. Over the decades, disastrous events such as the Great Depression, which occurred in the 1930s, and the Great Recession during the 2000s, have led to a significant expansion of the tasks and responsibilities of the Federal Reserve System. The Federal Reserve System has immense power to act to ensure financial stability.
The Federal Reserve System is the primary regulator of banks that are members of the
Federal Reserve System. The FRS is the lender of last resort to its member institutions that have no other place from which to borrow. It has a directive to guarantee that there is financial stability in the system. The Federal Reserve System is also the main regulator of the United State’s financial institutions.
The Federal Reserve System has 12 regional federal banks. These are based in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The Eccles Building, situated in Washington, D.C., serves as the headquarters of the Federal Reserve System.
The Roles and Responsibilities of the Federal Reserve System
The Federal Reserve System has a monetary policy with three main objectives, which include maximising sustainable employment; stabilising prices; and moderating long-term interest rates.
The first two objectives are at times called the Federal Reserve’s dual mandate. The duties of the Federal Reserve System have expanded over the years and also currently include roles such as supervising and regulating banking institutions in an attempt to ensure the safety of the United States banking and financial system and also to protect consumers’ credit rights while maintaining the stability of the fiscal system and containing systemic risks.
Lastly, it also includes providing financial services to depository institutions and plays an important role in operating the national payments system, depository institutions of the United States government, and foreign official institutions. The Federal Reserve System also conducts research into the economy and provides a range of publications, including the Beige Book and the FRED database. Even though the United States Treasury Department is responsible for issuing coins, the Federal Reserve System manages paper money, which is technically known as Federal Reserve notes. The notes issued currently by them include $1, $2, $5, $10, $20, $50, and $100 notes. The largest denomination ever issued by the Federal Reserve note to be circulated among the public was the $10,000 note!
The basic structure of the Federal Reserve System
At the heart of the FRS are seven members of the Board of Governors, also referred to as the Federal Reserve Board (FRB) in Washington, D.C. The members of the Federal Reserve System are appointed by the president and approved by the United States Senate. Each governor can serve a maximum of 14 years, and each governor’s appointment is staggered by a two-year period to limit the power of the president. This long, 14-year term is a key feature of the Federal Reserve System’s structure and is designed in order to protect Federal Reserve Board members from political pressures. The President also appoints a Chair and two Vice
Chairs of the Federal Reserve Board from among these members for four-year terms. These leadership roles have to be approved by the Senate and might be renewed. The Board of Governors reports to Congress and is directly accountable to Congress.
Additionally, the law also dictates that the appointments should represent all broad sectors of the United States economy. Furthermore, each of the 12 regional banks has a president of its own. Twelve regional Federal Reserve Banks, located in various cities all over the United States, are tasked with regulating and overseeing privately owned commercial banks. It is necessary for nationally chartered commercial banks to hold stock, and they are allowed to elect some board members of the Federal Reserve Bank of their region. The Federal Reserve’s Board of Governors is in charge of setting reserve requirements. Reserve requirements are the amount of money that banks should hold to ensure that they have enough to meet the need for sudden withdrawals if it arises. The Federal Reserve’s Board of Governors also sets the discount rate, which is the interest rate that the Federal Reserve System charges on loans that are made to financial institutions and other commercial banks.
The Federal Open Market Committee
The Federal Open Market Committee (FOMC) is the Federal Reserve’s key monetary policymaking body. It is in charge of open market operations, which include the buying and selling of government securities. The FOMC includes the Board of Governors, or the Federal Reserve Board (FRB), which includes the president of the Federal Reserve Bank of New York and the presidents of four other regional Federal Reserve Banks who serve on a turn-by-turn basis. The Federal Reserve System, like many central banks across the world, uses a tool known as quantitative easing (QE) to grow private credit, lower interest rates, and expand
investment and commercial activity via FOMC decision-making. Quantitative easing is primarily used to stimulate economies during recessions when credit is scarce, such as during and after the 2008 financial crisis.