What is Federal Reserve System or What is FED 

by

Rajesh Goyal     

Now a days we come across daily lot of bank related news which are international in nature but directly or indirectly affect the Indian banking system and thus Indian bankers can not ignore such news.  However, with little or no background on the systems prevalent in USA, UK and other  European countries, Indian bankers struggle to understand the nitty-gritty's of such news.   Thus, to make life easier for bankers who are interested to widen their horizon and for youngsters who are looking for opportunities in Financial sector, we are starting a series of articles which will keep on covering certain basic topics in easy to understand language.

What is Federal Reserve System or FED :

Federal Reserve System is world wide  popularly is known as FED  is the Central Banking System of the United States.   It was established on 23rd December 1913,  with the enactment of the Federal Reserve Act.   Its Headquarters is at Washington DC.    The following is the seal of FED :

What are Objectives or Roles Given to FED :

FED was originally established with three with three key objectives for monetary policy -  (a) Maximum employment; (b) Stable Price; and (c) Moderate long term interest rates.    The first two system are popularly known as the 'Federal Reserve's  Dual Mandate.  Over the years, the roles and duties of the FED have grown and now includes the responsibilities for monetary policy, supervising and regulating banking institutions, maintaining the stability  of the financial system and providing financial services to depository institutions, the US government and foreign official institutions. 

Structure of Federal Reserve System or FED :

Federal Reserve System broadly consists of following :-

   (A) Board of Governors appointed by President.  It is called known as "Federal Reserve Board".

   (B) Federal Open Market Committee (Popularly known as FOMC).  The details of this Committee are given below

   (C) Twelve regional Federal Reserve Banks.  These are located in major citiies of USA

The above structure is unique in the world for a central bank as FED has both private and public components and was envisaged to serve the interests of both the general public and private bankers.  Surprisingly,  US currency is not created by FED, but by the U.S. Department of Treasury’s Bureau of Engraving and Printing prints paper money, while the Treasury’s U.S. Mint produces coins.    FED is considered as an independent body but within government.   The monetary policies decided by FED need to be approved by either President of USA or anyone else in the executive or legislative branches of government. 

(A) Board of Governors :

It is a seven member body  and member is chosen by Presidnet of USA for a term of 14 years and are confirmed by Senate.  The term of one Governor begins every two years on 1st February of even numbered years.   A member who serves a full term may not be reappointed.   However, a member who completes an unexpired portion of a term may be reappointed.   If a member leaves the Board before his or her term expires, the person appointed and confirmed to serve the remainder of the term may be later reappointed to a full term.  All terms end on their statutory date regardless of the date on which the member is sworn into office. The Chairman and Vice Chairman of the Board of Governors are appointed by the President from among the sitting Governors.  They have a term of four years but can be re-nominated as many times as the President wishes until their terms on the Board of Governors expire. 

The present members of the Board are :-

The Federal Reserve’s responsibilities include:

(a) conducting the nation’s monetary policy to help maintain employment, keep prices stable, and keep interest rates relatively low
(b) supervising and regulating banking institutions to make sure they are safe places for people to keep their money and to protect consumers’ credit rights.
(c) providing financial services to depository institutions, the U.S. government, and foreign central banks, including playing a major role in clearing checks, processing electronic payments, and distributing coin and paper money to the nation's banks, credit unions, savings and loan associations, and savings banks.
 

The Federal Reserve System also  conducts research on the U.S. and regional economies.  distributes information about the economy through publications, speeches, educational seminars, and web sites.
 

(B) Federal Open Market Committee :

The Federal Open Market Committee is popularly known as FOMC. This Committee consists of twelve members--(a) the seven members of the Board of Governors, (b) the president of the Federal Reserve Bank of New York, and (c) four of the other eleven Reserve Bank presidents. The four Reserve Bank presidents serve one-year terms on a rotating basis.  Non-voting Reserve Bank presidents attend the meetings of the Committee, participate in discussions, and contribute information about economic conditions in their District.

 

The FOMC schedules eight meetings per year, one about every six weeks or so. The Committee may also hold unscheduled meetings as necessary to review economic and financial developments. The FOMC issues a policy statement following each regular meeting that summarizes the Committee's economic outlook and the policy decision at that meeting. Four times per year the Chairman holds a press briefing after the FOMC meeting to present the FOMC's current economic projections and to provide additional context for the FOMC's policy decisions. A full set of minutes for each FOMC meeting is published three weeks after the conclusion of each regular meeting, and complete transcripts of FOMC meetings are published five years after the meeting.

 
The purpose of the FOMC is to determine the nation’s monetary policy. The FOMC holds EIGHT regularly scheduled meetings each year in Washington, D.C. At these meetings, the FOMC reviews economic and financial conditions and sets monetary policy. The term “monetary policy” refers to the actions taken by a central bank, such as the Federal Reserve, to help encourage a healthy economy. The actions taken influence the availability and cost of money and credit, which affect a range of economic variables, including output, employment, and prices of goods and services.


At each of its meetings, the FOMC decides whether or not to change its target for the federal funds rate, and if so, by how much. The FOMC also issues a statement after each meeting explaining its decision, and these statements contain some important information about the FOMC’s evaluation of the economy
 

(C) 12 Federal Reserve Banks?

Under the Federal Reserve System, the United States is divided into twelve regions, or Districts. Each District has a Reserve Bank serving it.    The twelve Reserve Banks are named after the city in which they are located:     Boston | New York | Philadelphia | Cleveland | Richmond | Atlanta | Chicago St. Louis | Minneapolis | Kansas City | Dallas | San Francisco.  Thus, there are 12 Federal Reserve Banks (with 25 branches) .   Each reserve Bank is responsible for member banks located in its district. The size of each district was set based upon the population distribution of the United States when the Federal Reserve Act was passed. Each regional Bank has a president, who is the chief executive officer of their Bank.  The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally-created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.  These twelve Federal Reserve Banks and their Branches carry out functions like operating a nation wide payments system, distributing the nation's currency and coin, supervising and regulating member banks and bank holding companies and serving as  a banker for the US Treasury.  Each of these banks is responsible for the particular geographic are or district of US, these also act as a depository for the banks in their own district and fulfill other responsibilities.

ADVISORY  COMMITTEES : The above Federal Reserve System also uses Advisory Committees for carrying out its varied responsibilities.  There are three main Committees which directly advise the Board of Governors, namely (a) Federal Advisory Council - composed of 12 representatives of the banking industry.; (b) Consumer Advisory Council : It advises the Board on the exercise of its responsbilities under the Consumer Credit Protection Act on other matters in the area of consumer financial services; (c) Thrift Institutions Advisory Council.
 

Source : Wikipedia and Federal Reserve Bank websites etc.