Historical Structure of the Fed

The Board of Governors and the Reserve Banks were established by the Federal Reserve Act in 1913. Following a financial crisis from the panic of 1907, many agreed the US needed a formal Central Bank. In a proposal to Congress, the structure of the Federal Reserve System was said to be “scientific in its method, and democratic in its control.” The act was signed by President Woodrow Wilson in December of 1913. The act created the structure of the Board of Governors and the existence of the Reserve Banks, but did not outline the existence of the FOMC.

While the Federal Reserve Act outlined the existence of 8 to 12 Reserve Banks, it did not specify where the banks should be located. In early 1914, the Reserve Bank Organization Committee—made up of the Secretary of the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency—held hearings and conducted research to help them decide how many banks there should be and where they should be located. Thirty-seven cities applied to host one of the Reserve banks. In April 1914, they announced the 12 new Federal Reserve districts and the cities that would host each Federal Reserve Bank. The location of each bank was determined largely through survey results from national banks, as well as the location of economic life in the early 20^th century. All 12 Reserve Banks opened in November of 1914.

After the Federal Reserve System proved its importance throughout World War I, the McFadden Act in 1927 solidified the existence and roles of the Reserve Banks. The law extended the Bank charters into perpetuity and revised commercial banking laws to support the competitiveness of the Reserve Banks.

Over the years, amendments to the Federal Reserve Act and other laws have changed the structure and functions of the Federal Reserve. The first significant change was the creation of the FOMC through the Banking Act of 1933, commonly known as Glass-Steagall. Following that, the Banking Act of 1935 gave voting rights to the Board members of the FOMC. Moreover, the Banking Act of 1935 redefined the Fed’s relationship with the executive and legislative branches, as well as with the Treasury. These shifts led to a change in the terminology used to represent leaders of the Federal Reserve System. The Banking Act of 1935 took effect in 1936.

In 1955 following the Treasury-Fed Accord, Fed Chair William McChesney Martin shifted monetary policy decision making strictly to the FOMC by abolishing the Executive Committee. This further established the Federal Reserve System’s as separate from the executive branch and set the tone for the Fed’s modern state of independence.

Over the second half of the 20^th century, there were a number of amendments to the Federal Reserve Act and laws passed through Congress that influenced the Federal Reserve System. Although these changes primarily impacted the functions of the Federal Reserve and did not cause substantial changes to the System’s structure.

In the 21^st century, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 following the 2008 financial crash with the subprime mortgage crisis and collapse of private institutions. Dodd-Frank created additional advising entities within the Federal Reserve System and gave the Fed more supervisory powers over banks. The act established the Financial Stability Oversight Council within the Treasury and the Consumer Finance Protection Bureau (CFPB).

The president, U.S. Treasury Department, and Congress don’t ratify the Fed’s decisions, although the board members are selected by the president and approved by the Senate. This gives elected officials control over the Fed’s long-term direction but not its day-to-day operations.

How Does the Federal Reserve Work?

To understand how the Fed works, you must know its structure. The Federal Reserve System has three primary components:

• The seven members of the board of governors guide the entire Fed system. They direct monetary policy and set the discount rate for member banks. Staff economists provide all analyses.
• The 12 regional Federal Reserve Banks work with the board to supervise the nation’s commercial banks and implement policy.
• The Federal Open Market Committee (FOMC) oversees open market operations. The seven board members, the president of the Federal Reserve Bank of New York, and four of the remaining 11 regional bank presidents are members. The FOMC meets eight times a year.

Congress created the Fed’s board structure to ensure its independence from politics. Board members serve staggered terms of 14 years each. The president appoints a new one every two years, and the U.S. Senate confirms them. If the staggered schedule is followed, then no president or congressional party majority can control the board.

Regional Reserve Banks

The Federal Reserve System has 12 Districts, each served by an independently chartered regional Reserve Bank. These Banks are in Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, St. Louis and San Francisco. There are also 25 Branch offices within the 12 Districts.

They:

• distribute currency and coins
• provide short-term loans to banks
• supervise banks
• provide educational information on consumer protection rights and laws

The Reserve Banks also provide a wealth of information on conditions across the nation—information that is vital to formulating a national monetary policy that helps maintain a healthy U.S. economy and stable financial system.

Each of the Federal Reserve Districts is headquartered in a Federal Reserve Bank: First (Boston), Second (New York), Third (Philadelphia), Fourth (Cleveland), Fifth (Richmond), Sixth (Atlanta), Seventh (Chicago), Eighth (St. Louis), Ninth (Minneapolis), Tenth (Kansas City), Eleventh (Dallas), and Twelfth (San Francisco). The Reserve Banks are independent corporations overseen by each respective Bank’s Board of Directors.

Board of Governors

The Board of Governors is an independent government agency based in Washington, D.C. “Independent” means that it does not receive its funding through the congressional budget and appropriations process, and its leadership does not change when a new U.S. president takes office. This agency oversees the operations of the 12 Reserve Banks across the United States. The name “Board of Governors” is used for both this agency and the seven-member board that governs it.

The Board of Governors consists of seven members who are appointed to 14-year terms by the president of the United States and confirmed by the Senate.

The Board of Governors’ main goal is to monitor and promote the stability of financial markets. The Board conducts monetary policy, issues regulations under most federal consumer credit protection laws and has broad responsibility for the U.S. payments system and the activities of various banking organizations. The Board also has general oversight over the Reserve Banks and Branches. The Board reports to and is accountable to Congress. Although Congress sets the goals for monetary policy, decisions made by the Board and specifically the Fed’s monetary policy-setting body, the FOMC, do not require approval by the President or anyone else in the executive or legislative branches of government. The seven members of the Board of Governors oversee the Board Committees and sit on the FOMC.

Federal Open Market Committee (FOMC)

The rate-setting FOMC is made up of seven Fed Governors and five of the 12 Reserve Bank presidents, who vote on a rotating basis with the exception of the New York Fed president, who always votes. All 12 Reserve bank presidents participate in FOMC policy deliberations whether or not they are voting members. The FOMC meets eight times a year.

The Federal Open Market Committee, or FOMC, is a 12-person group of Federal Reserve System officials that sets crucial U.S. monetary policy at meetings held at least 8 times each year.

The FOMC’s monetary policy actions influence interest rates and credit conditions, which can significantly impact financial conditions, including economic productivity and even spending and investment decisions by households, communities, and businesses.

The FOMC makes all decisions regarding the appropriate position or “stance” of monetary policy to help move the economy toward the congressionally mandated goals of maximum employment and price stability.

Why is the Federal Reserve System structured this way?

The Fed was designed as a decentralized independent agency to ensure that monetary policy decisions would be representative of all regions of the country and free from political influence. Research shows that countries with high central bank independence usually maintain lower levels of inflation.

The Fed’s monetary policy decisions don’t have to be approved by the President, the executive branch of the government, or Congress. However, the Fed is subject to oversight by Congress and is required to conduct monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates.

Others

What other groups are part of the Federal Reserve System today?

Member Banks and Other Depository Institutions

In addition to the three main entities, member banks and other depository institutions are a part of the Federal Reserve System. All nationally chartered banks are required to be members of the system and state banks have the option to join as members if they meet certain requirements as stated in the Federal Reserve Act. Member banks are required to hold capital as stock at the Reserve Bank in their district because member banks are stockholders of their respective Reserve Bank. In addition, other depository institutions that provide financial services to Americans are subject to the regulations in place by the Federal Reserve System even if they are not member banks. Because of its services and regulatory processes with member banks and other depository institutions, the Federal Reserve is commonly referred to as “a bank for other banks.”

Advisory councils

The Federal Reserve System and its three separate entities are advised by a number of different groups. The Board of Governors is advised by five groups: First, the Federal Advisory Council (FAC) was established by the Federal Reserve Act to oversee the Board, and is made up of representatives from each district who are elected by each Reserve Bank. Second, the Community Depository Institutions Advisory Council (CDIAC) was established by the Board of Governors in 2010 obtains information from thrift institutions and credit unions to inform the Board on lending conditions. The 12 members of the CDIAC are appointed from representatives of depository institutions who serve on advisory councils for their respective Reserve district. Third, the Model Validation Council was established by the Board of Governors in 2012 to provide expert and independent advice on the Federal Reserve’s stress tests of banking institutions that are required under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Fourth, the Community Advisory Council (CAC) was established by the Board in 2015 to offer a diverse perspective on economic and financial life for the sake of consumers. Lastly, the Insurance Policy Advisory Committee (IPAC) was established in 2018 by the Board of Governors to provide advice and information to the Board on international insurance standards and insurance issues.

Consumer Financial Protection Bureau

The Bureau of Consumer Financial Protection (CFPB) is an independent bureau within the Federal Reserve System. Like the Fed, the CFPB is not part of the congressional budget and appropriations process, but gets its funding directly from the Federal Reserve. The CFPB was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Both the CFPB and the Fed are subject to the independent oversight of the Office of the Inspector General.

What’s the Role of the Fed Chair?

The Federal Reserve chair sets the direction and tone of both the Federal Reserve Board and the FOMC. Chairman Jerome Powell, a Fed board member, began his term as chair on Feb. 5, 2018.

The previous chair was Janet Yellen, who subsequently became the Secretary of the Treasury. Her term ran from 2014 to 2018. Yellen’s biggest concern was unemployment, which made her more likely to want to lower interest rates. Ironically, she was the chair when the economy required contractionary monetary policy.

Ben Bernanke served as chair from 2006 to 2014. He was an expert on the Fed’s role during the Great Depression, which helped him take steps to end the 2008 financial crisis. This helped keep the economic situation from turning into a depression.

Financial Services

Federal Reserve Financial Services is an integrated organization within the Federal Reserve that is responsible for managing critical payment and securities services that foster the accessibility, integrity and efficiency of the U.S. economy. Through its relationships with about 10,000 financial institutions nationwide, the Federal Reserve provides equitable access to a system that facilitates more than $5 trillion payments each day. Federal Reserve Financial Services, delivered via a secure FedLine^® network, include FedCash^® Services, FedACH^® Services, Check Services, Fedwire^® Funds and Securities Services, the National Settlement Service and more. The Federal Reserve also collaborates broadly with payments stakeholders on improvement initiatives (Off-site), to advance the end-to-end speed, security, efficiency of domestic and cross-border payments. This collaboration led to and has informed development of the FedNow^® Service, a new instant payments infrastructure launched in 2023 that joins the FRFS product offering.

Central Bank Programs

The Federal Reserve carries out the nation’s monetary policy guided by the goals set forth in the Federal Reserve Act, namely “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

The Federal Reserve Banks offer a range of tools and information to assist financial institutions in meeting reporting requirements and understanding policies governing reserve balances, term deposits, and discount window lending programs.

U.S. Treasury Services

The Federal Reserve acts as a fiscal agent or bank to the federal government by providing financial services to the United States Department of Treasury and by selling and redeeming government securities such as Savings Bonds and Treasury bills.