What Is the Federal Reserve?
the Federal Reserve
The Federal Reserve oversees the nation’s banks and sets national monetary policy. Its policies influence how much money we have in our checking and savings accounts, how easy it is to get a mortgage or car loan, and the interest rates we pay on credit cards and loans. The Fed’s powers are enormous, but it is a semi-independent agency that works with the rest of the government.
The Fed’s structure is unusual. It consists of three major entities: the Board of Governors in Washington, DC; 12 regional Federal Reserve Banks; and the Federal Open Market Committee (FOMC). The board is made up of seven people who are nominated by the president and confirmed by the Senate. They serve 14-year terms that are staggered to ensure continuity. The chair and vice chair serve four-year terms.
Each of the 12 Reserve Banks operates within a geographic area called a District. The Banks’ responsibilities include moving currency and coin into and out of circulation, operating bank clearinghouses that clear millions of checks daily, issuing and redeeming government securities, providing checking accounts for the U.S. Treasury and the public, and strengthening local communities. You can tell where your money comes from by the circular mark on the left side of a bill or coin, which is accompanied by the name of the Federal Reserve District it came from. You can find a map of the Fed’s twelve districts here.
What Is the Federal Reserve?
The central bank’s most visible role is setting interest rates. The Fed influences the money supply by buying or selling U.S. bonds in the open market to affect the nation’s discount rate and thus the interest rate that banks charge each other on loans. The Fed also has the power to make short-term loans to banks to increase or decrease the money supply.
One of the Fed’s main objectives is to keep inflation under control and achieve full employment. The Fed’s governing body, the Board of Governors, is charged with setting monetary policy and monitoring economic conditions to ensure that goals are met. The chairman reports to Congress twice a year on the Fed’s monetary policy objectives, and the Federal Reserve Act requires that the board have frequent contact with Congress.
In addition to establishing monetary policy, the Federal Reserve is responsible for regulating the banking industry. It issues regulations to carry out the major federal laws relating to consumer credit, including the Truth in Lending, Equal Credit Opportunity and Home Mortgage Disclosure Acts. It also regulates the operations of depository institutions, such as banks and credit unions, to ensure that they meet minimum capital requirements and adhere to consumer protection rules.
The Fed’s regulatory powers grew throughout the 1990s, as it became more concerned with protecting consumers from abusive lending practices and limiting their exposure to risk. Its role in supervision and regulation of financial institutions was strengthened with the 1999 Dodd-Frank Act, which removed some barriers to the mergers of securities, insurance and banking companies.