Federal Reserve System

The purpose of the Federal Reserve System (The Fed) is to ensure stability in the banking system and to keep short-run political pressures out of monetary policy. The Federal Reserve System was created by the U.S. Congress and signed into law by President Woodrow Wilson on December 23, 1913, following a series of bank panics years earlier. In subsequent statutes, Congress refined The Fed's purpose to include enabling economic growth consistent with the U.S. economy's potential, a high level of national employment, stability in the purchasing power of the U.S. dollar, and moderate long-term interest rates.

The Federal Reserve System is composed of a seven-member board of governors and 12 regional Federal Reserve Banks with their 25 branches, which share the responsibilities mandated of the system. The Federal Reserve System is an independent entity within the government that is self-funded through its various operations. It is structured to have both public purposes and private aspects. The Federal Reserve System and its components are subject to several levels of review and [Page 866]audit, and its ultimate accountability is to the U.S. Congress, which can alter the responsibilities of the System by statute.

The seven presidential appointees to the board of governors are required to be representative of “the financial, agricultural, industrial and commercial interests and geographical divisions of the country.” The members of the board of governors are appointed for 14-year terms with staggered appointments. A staff of about 1,700 in Washington, D.C., supports the board of governors.

Each of the 12 regional Federal Reserve Banks is designated a distinct letter and a number as an identifier. The regional Federal Reserve Banks supervise and regulate certain financial institutions and activities, they provide banking services to depository institutions and the federal government, and they ensure consumers receive adequate information and fair treatment in their transactions with the banking system.

A major component of the Federal Reserve System is the Federal Open Market Committee (FOMC). The FOMC oversees open market operations to influence money market conditions and the growth of the money supply and credit. The FOMC is a voting committee composed of the board of governors of the Federal Reserve, the president of the Federal Reserve Bank of New York, and presidents of four other Federal Reserve Banks who serve on the committee on a rotating basis. The rotating seats are filled from four groupings of the regional Federal Reserve banks. All the Federal Reserve Bank presidents attend the FOMC meetings and participate in the discussions. The FOMC normally meets for one day (the JanuaryFebruary and June-July meetings are two-day meetings) eight times each year in Washington, D.C., to discuss policy options related to the financial markets, the foreign exchange markets, and the trading desk activities of the New York Federal Reserve Bank. The FOMC deliberates monetary policy options at its meetings and then issues directives to the New York Fed's domestic trading desk on whether to tighten, maintain, or ease existing policy through the buying or selling of U.S. government securities. In addition to the open market operations, the Federal Reserve System conducts monetary policy through reserve requirements for depository institutions and through the discount rate paid by depository institutions when they borrow reserves from a regional Federal Reserve Bank.

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