What is the Federal Reserve System?
The Federal Reserve System is the central bank of the United States and arguably the most powerful financial institution in the world. The Federal Reserve System was founded by the United States Congress in 1913 to provide the nation with a secure, flexible and stable monetary and financial system.
It is based on a federal system that includes a central government agency (the Board of Governors) in Washington, DC, and 12 regional federal reserve banks which are each responsible for a specific geographic area of the United States. The Federal Reserve is considered independent because its decisions must not be ratified by the president or any other government official. However, it is still under the control of Congress and must work within the framework of the government’s economic and financial policy objectives. Often known simply as “the Fed”.
Understanding the Federal Reserve System
The creation of the Federal Reserve was precipitated by repeated financial panics that affected the US economy over the past century, causing severe economic disruption due to bank failures and corporate bankruptcies. A crisis in 1907 led to calls for an institution that would prevent panics and disturbances.
The 12 regional authorities are based in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Saint Louis, Minneapolis, Kansas City, Dallas and San Francisco.
The functions of the Federal Reserve can be classified into four general areas:
- Conduct a national monetary policy by influencing monetary and credit conditions in the US economy to guarantee maximum employment, stable prices and moderate long-term interest rates.
- Supervise and regulate banking institutions in order to ensure the security of the American banking and financial system and protect consumers’ rights in terms of credit.
- Maintain the stability of the financial system and contain systemic risk.
- Provide financial services – including a pivotal role in the operation of the national payment system – to deposit-taking institutions, the United States government, and official foreign institutions.
The main governing body of the Federal Reserve’s monetary policy is the Federal Open Market Committee (FOMC), which includes the Board of Governors, the chairman of the Federal Reserve Bank of New York and the chairmen of four other regional reserve banks. which sit in turn.
The committee is responsible for monetary policy decisions, which are classified into three areas; maximize employment, stabilize prices and moderate long-term interest rates. The first two are known as the Fed’s dual mandate.
The Fed’s main source of income is interest in a range of US government securities it has acquired in the course of its operations. Other sources of income include interest on foreign currency investments, interest on loans to deposit-taking institutions and service charges (such as check clearing and money transfers) provided to these institutions. After paying its expenses, the Fed transfers the rest of its profits to the United States Treasury.