Federal Reserve
The Federal Reserve is one of the most powerful government agencies in the United States, but its role and its decisions are often misunderstood. The central bank influences the money supply and other financial markets, which can affect you and your wallet in a variety of ways. It also helps regulate and supervise banks. In a very real sense, the Fed is responsible for creating money—not by printing it, but by effectively adding funds to the economy.
Founded by Congress in 1913, the Federal Reserve System is composed of a central governing board, 12 regional Reserve Banks and a policy arm. The Fed conducts five general functions to promote the effective operation of the U.S. economy and, more specifically, to foster maximum employment, stable prices and moderate long-term interest rates.
The Fed’s core values guide the actions of its employees and board members. They include promoting the public interest, encouraging community development and economic opportunity and maintaining integrity in all of its interactions. The Federal Reserve Board prioritizes transparency, including explaining its approach to monetary policy and financial stability and publishing reports on those efforts.
What Does Federal Reserve Do?
Fed Governors are appointed for 14-year terms, with the length of their term based on whether they’re filling an empty seat or a full one. This is supposed to insulate the Fed from political influence, preventing presidents from stacking the board with their preferences. But some critics have argued that the 14-year terms actually weaken the Fed’s independence.
The Federal Reserve’s regional presence is key to its ability to conduct monetary policy. Its 12 regional Reserve Banks serve as regional clearinghouses for financial services, providing deposit and withdrawal services at local branches and processing millions of checks each day. They also help oversee and examine member banks for safety and soundness, store the cash reserves of depository institutions and loan them funds. Each district also has an advisory committee made up of local officials and business leaders.
To implement monetary policy, the Fed’s governing body, the Federal Open Market Committee (FOMC), sets an objective for its open market operations — the buying and selling of Treasury securities. This in turn sets the target federal funds rate, which is used to influence other interest rates and adjust the money supply. The FOMC also determines the discount window rate, which is what Reserve Bank directors charge to commercial banks and other depository institutions that make short-term loans through it.
The Fed also earns income from investments, fees and other income. The main source of revenue, however, is the interest on its foreign currency investments and from the sale of U.S. government securities to cover its expenses. The Fed transfers the rest of its earnings to the U.S. Treasury each year. In addition to the core functions of the Fed, the system provides certain financial services to federal and other government agencies, U.S. financial institutions, and foreign official institutions.
