The structure of the Federal Reserve System (2024)

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About the Federal Reserve System

The Federal Reserve System is the central bank of the United States.

It performs five general functions to promote the efficient functioning of the U.S. economy and, more generally, the public interest. Federal Reserve

• conducts the country's monetary policypromoting maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;
• promotes stability in the financial systemand seeks to minimize and mitigate systemic risk through active monitoring and engagement in the United States and abroad;
• promotes the safety and soundness of individual financial institutionsand monitors its impact on the financial system as a whole;
• promotes the security and efficiency of the payment and settlement systemthrough banking and U.S. government services that facilitate U.S. dollar transactions and payments; And
• promotes consumer protection and community developmentthrough consumer-oriented monitoring and research, research and analysis of emerging consumer issues and trends, socio-economic development activities and the administration of consumer laws and regulations.

Read more in the 11th edition ofFederal Reserve SystemFed explained.

The decentralized system structure and its philosophy

When the Federal Reserve System was created, the United States was divided geographically into twelve districts, each with a separate built-in reserve bank. District boundaries were based on the prevailing trading regions that existed in 1913 and related economic considerations, so they do not necessarily coincide with state boundaries.

As originally envisioned, each of the twelve Reserve Banks was intended to operate independently of the other Reserve Banks. Variation was expected in discount rates: the interest commercial banks charge to borrow money from a reserve bank. The establishment of a separately determined discount rate, appropriate for each district, was considered the most important monetary policy instrument at the time. The concept of national economic policy was not well developed and the impact of open market operations – the purchase and sale of US government bonds – on policymaking was less significant.

As the country's economy became more integrated and complex through advances in technology, communications, transportation, and financial services, the effective implementation of monetary policy began to require greater cooperation and coordination across the system. This was accomplished in part through revisions to the Federal Reserve Act in 1933 and 1935, which together created the modernFederal Open Market Committee(FOMC).

The Depository Institutions Deregulation and Monetary Control Act of 1980 (Monetary Control Act) introduced an even greater degree of coordination among Reserve Banks in the pricing of financial services offered to depository institutions. There is also a tendency among the Reserve Banks to centralize or consolidate many of their financial services and support functions, and to standardize others. Reserve banks have become more efficient by entering into service agreements within the system that divide responsibility for services and functions of national scope among each of the twelve reserve banks.

The American approach to central banking

The authors of the Federal Reserve Act deliberately rejected the concept of a single central bank. Instead, they envisioned a central banking system with three salient features: (1) a central board of directors, (2) a decentralized operating structure with twelve reserve banks, and (3) a combination of public and private features.

Although parts of the Federal Reserve System share some characteristics with private entities, the Federal Reserve was created to serve the public interest.

There are three major entities in the Federal Reserve System: the Board of Governors, the Federal Reserve Banks (Reserve Banks), and the Federal Open Market Committee (FOMC). The Board of Governors, an agency of the federal government that reports to and is directly accountable to Congress, provides overall direction for the system and oversees the twelve reserve banks.

Within the system, certain responsibilities are shared between the Board of Governors in Washington, D.C., whose members are appointed by the President with the advice and consent of the Senate, and the Federal Reserve Banks and Branches, which provide the system's operational presence around the form a system. country. Although the Federal Reserve communicates frequently with executive branch officials and Congress, its decisions are made independently.

The three central units of the Federal Reserve

OfBoard of Governors of the Federal Reserve(Board of Directors), theFederal Reserve Bank(Reserve Bank), andFederal Open Market Committee(FOMC) makes decisions that help promote the health of the U.S. economy and the stability of the U.S. financial system.

Other major entities that contribute to the functions of the Federal Reserve

Two other groups play important roles in the core functions of the Federal Reserve System:

1. depository institutions - banks, thrift institutions and credit unions; And
2. The advisory committee of the Federal Reserve System, which makes recommendations to the board and reserve banks regarding the system's responsibilities.

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Depository institutions offer transactional or checking accounts to the public and may have their own accounts at their local Federal Reserve Banks. Depository institutions must meet reserve requirements, which means they must have a certain amount of cash on hand or in an account at a reserve bank, based on the total balances of the current accounts they maintain.

Depository institutions that have higher balances in their reserve bank accounts than they need to meet reserve requirements may make loans to other depository institutions that need these funds to meet their own reserve requirements. This rate affects interest rates, asset prices and wealth, exchange rates and thus overall demand in the economy. The FOMC sets a target for the federal funds rate at its meetings and authorizes actions called open market operations to achieve that target.

Advisory board

Five advisory boardsassist and advise the board in matters concerning public order.

1. Federal Advisory Council (FAC).This council, created by the Federal Reserve Act, consists of twelve representatives from the banking industry. The FAC normally meets with the board four times a year, as required by law. Each year, each Reserve Bank elects one person to represent its district on the FAC. FAC members typically serve three one-year terms and elect their own officers.
2. Community Depository Institutions Advisory Council (CDIAC).CDIAC was originally formed by the Board to obtain information and views from thrift institutions (savings and loan institutions and mutual savings banks) and credit unions. Membership recently expanded to include community banks. Like the FAC, the CDIAC provides the board with first-hand insight and information on the economy, credit conditions and other issues.
3. Model validation board.This council was established in 2012 by the Board of Directors to provide expert and independent advice on its process for carefully assessing the models used in stress testing of banking institutions. Stress testing is required under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The council must improve the quality of the stress tests and thus strengthen confidence in the stress test program.
4. Community Advisory Council (CAC).This council was established by the Federal Reserve Board in 2015 to provide diverse perspectives on the economic conditions and financial services needs of consumers and communities, with a particular focus on the concerns of low- and moderate-income populations. The CAC complements the FAC and CDIAC, whose members represent depository institutions. The CAC meets every six months with members of the Board of Directors. The 15 CAC members serve staggered three-year terms and are elected by the Board of Directors through a public nomination process.
5. Insurance Policy Advisory Committee (IPAC).This council was established in 2018 in the Board of Directors pursuant to section 211(b) of the Economic Growth, Regulatory Relief and Consumer Protection Act. IPAC provides information, advice and recommendations to the board on international insurance capital standards and other insurance issues.

Federal Reserve banks also have their own advisory committees. Perhaps the most important of these are committees that advise the banks on agricultural, small business and labor matters. The Federal Reserve Board gathers views from each of these committees every two years.