Perhaps the part of the U.S. economy most closely watched by investors, the Federal Reserve is a somewhat misunderstood institution. Most investors think of the Federal Reserve as being Alan Greenspan and the Federal Open Market Committee (FOMC). While this group might be the most influential within the Federal Reserve System, it is a small part of the whole picture. This section will provide a brief overview of the Federal Reserve and its different parts.
The Federal Reserve System
Basically, the Federal Reserve System is America’s central bank. It was established in 1913 to maintain a sound and stable banking system throughout the United States and to promote a strong economy. The Federal Reserve System is composed of 12 regional banks in major cities around the country and the Central Bank, which is run by the Board of Governors and is based in Washington, D.C. The Board of Governors is made up of 7 members that are appointed to 14-year terms by the President and approved by the Senate. Almost all banks are a part of the Federal Reserve System, which requires that those banks maintain a certain percentage of their assets deposited with the regional Federal Reserve Bank. These “reserve requirements” are set by the Board of Governors and by changing the requirements, the Federal Reserve System can greatly impact the amount of money supply in the economy. Because of the great impact of changing the reserve requirement, the Federal Reserve rarely does this.
The Federal Reserve System wears a great number of hats. First, it serves as a bank for banks: many transactions between banks are processed through the Federal Reserve System. Financial institutions are also able to borrow money through the Federal Reserve, but only after attempting to find credit elsewhere; the Federal Reserve System provides credit only when it cannot be found in the markets or in cases of emergency. Second, the Federal Reserve System acts as the government’s bank. The tax system processes incoming and outgoing payments through a Federal Reserve checking account. The Federal Reserve also buys and sells government securities. The Fed even issues the U.S. currency, although the actual production of the currency is handled elsewhere. Third, the Federal Reserve System acts as a regulatory agency. The Fed polices the banking industry to make sure that things run smoothly and that the rights of consumers are protected.