The Federal Reserve System, or sometimes referred to as “the Fed” is the central bank of the United States. The agency was created through the House Resolution 7883 by Rep. Carter Glass and it came into effect on December 23, 1913 after President Woodrow Wilson signed the Federal Reserve Act. The Fed is entrusted with the responsibility of ensuring that the country will have a safer, more stable, and flexible financial and monetary system.
The responsibilities of the Fed basically fall into four general categories:
- US monetary policy – influences credit and money conditions within the economy for the purpose of stabilizing prices and generating employment
- Supervision and regulation – it oversees and regulates the nation’s banking institutions and protect the rights of consumers.
- US financial system – systematic risks that may arise from activities in the financial market are contained to prevent its spread.
- Financial services – the Fed also provides certain financial services to the public, the government, financial institutions, and even foreign institutions. It plays an important role in balancing the country’s payments system.
Structure of the Federal Reserve
The Federal Reserve is designed to have a broad perspective of the overall economy and economic activities in different parts of the United States. The Fed has a central agency in Washington, D.C. – the Board of Governors, and twelve regional branches. Its regional centers are located in major cities throughout the country. All Federal Reserve Banks share the responsibility of monitoring and regulating financial activities throughout the country and for ensuring that the public receives adequate information. They also have to provide services to federal government and to depository institutions.
One major component of the System is the Federal Open Market Committee (FOMC). This committee is composed of the Federal Reserve Bank of New York president, members from the Board of Governors, and four Federal Reserve Bank heads (serving on a rotating basis). The FOMC influences money market conditions in the economy.
As the central bank, the Federal Reserve gets its authority from Congress. However, it is also considered independent because its decision doesn’t have to be ratified by the executive or legislative branch. The Fed also does not receive funding from Congress although it is subject to Congressional oversight. Its funding is mainly derived from the interest on US government securities which is generated from open market operations. Other sources of funding are derived from interest on foreign currencies, fees for services, and interest on loans to depository institutions. Earnings will be sent to the US Treasury.Back