2) The Federal Reserve: What Is The Fed?

Originally, the US was not regulated by any organization for studying and implementing economic and monetary policy. Financial institutions were free to do whatever they wanted without real government intervention. As a consequence, markets were very unstable at that time. The banking system in return lacked the trust of the general public.

It was only in the year 1913 when the US Congress created the Federal Reserve. The Fed, as it is commonly called, is headed by a Board of Governors.  This board is a government agency in Washington consisting of seven members appointed by the President and confirmed by the Senate. Each of the members of the board serve 14-year terms and can be reappointed. The board is led by a chairman and a vice chairman, again, appointed by the President and, still, approved by the Senate, both of whom serve four-year terms.

The current chair of the Board of Governors of the US Federal Reserve is Ben Bernanke. He was appointed on February 1, 2006. Bernanke took over for Alan Greenspan who had been chairman since August of 1987.

Currently, there are regional Federal Reserve Banks in major locations all around the US. These are located in Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York City, Philadelphia, Richmond, San Francisco and St. Louis. These 12 banks, also called District Feds, are the operating arms of the Central Bank and do the bulk of the Fed’s work.  The District Feds also generate their own income used to finance the banks’ operations. Any excess income goes back to the US Treasury. The main sources of income are the following:

  • The services rendered to other banks;
  • Interests that are earned on government securities collected while doing the work of the Fed;
  • Interest on loans to depository institutions; and,
  • Income from foreign currency held.

The Federal Reserve has a policy-making branch called the FOMC, which is short for Federal Open Market committee.

The chair of the FOMC is traditionally headed by the chair of the board as well. The seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and the presidents of four other District Feds (who will serve on a one-year rotating style), compose the voting members of the FOMC. Even if the other presidents are currently not voting members, all District Fed presidents are required to participate in the FOMC policy discussions.

One of the main responsibility of the FOMC is to decide on interest rates, aside from making other monetary policies. This is the reason why it gets a lot of attention from the media.

It is also important to note that all national banks and selected state-chartered banks are part of the Federal Reserve System. They are referred to as member banks.