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The Federal Reserve: Who Are They and What Do They Do?

​​People think of the Fed as synonymous with interest rates, but it does so much more than that: It also regulates banks and sets policies designed to maintain a healthy economy specifically through stable prices and high employment.
Exterior of the Federal Reserve headquarters with the text overlay "The Federal Reserve: Who They Are & What They Do For You"

The Federal Reserve is “the bank to the nation’s banks."

Who Is the Federal Reserve?

The Federal Reserve is the central bank of the United States. Also known as “The Fed,” it is in charge of the country’s monetary policies. It also designs fiscal policies with the goal of achieving a healthy economy with low prices and maximum employment.

Which 3 Entities Make Up the Federal Reserve?

  1. The Board of Governors oversees the Federal Reserve system—including setting target interest rates known as the discount rate. It also controls reserve requirements. Governors are appointed by the U.S. President and confirmed by the U.S. Senate. The chair serves as executive officer and reports to the U.S. Congress about the U.S. economy.
  2. The 12 Federal Reserve Banks are the operating arm of the Federal Reserve. They act as the fiscal agents to the U.S. government as well as serve as “the bank to the nation’s banks” by lending money, printing and circulating currency, processing millions of checks and other deposits, and redeeming government securities.
  3. The Federal Open Market Committee (FOMC) manages open market operations by buying and selling securities. It meets eight times per year. The FOMC is made up of the Board of Governors, the president of the Reserve Bank of New York and presidents of 4 of the remaining 11 Reserve Banks, who serve rotating, one-year terms.

What Does the Federal Reserve do?

The Federal Reserve has three main functions.

  1. It conducts the nation’s monetary policy
  2. It ensures stability of our financial markets
  3. It regulates financial institutions

The Federal Reserve operates under a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates," according to the Richmond Regional Bank.

Who Is the Current Chair of the Federal Reserve?

Jerome Powell became Fed Chair on February 5, 2018. His term runs through May, 2026.  

What Does the FOMC Do?

It’s the job of the FOMC to monitor the U.S. economy and adjust interest rates accordingly. After the Financial Crisis of 2008, the FOMC has taken on additional responsibilities including quantitative easing, which was a large-scale buyback of U.S. Treasuries designed to increase liquidity, keep long-term interest rates low, and foster economic recovery. Throughout the COVID-19 pandemic, the FOMC has repeatedly stated that it would begin “tapering,” or reducing, these buybacks in order to stem inflation. This practice is also known as quantitative tightening.

How Does the Federal Reserve Set Monetary Policy?

The Fed requires depository institutions, like banks, thrifts, and credit unions, to keep a certain amount of the cash deposits they have on-hand as reserves. These reserve requirements are also known as federal funds.

When an institution’s reserves exceed what they need, they may lend some of their federal funds to other financial institutions, so that they, too, can meet reserve requirements. The rate of interest by which they make these loans is known as the federal funds rate.

The Fed calculates a bank’s reserve requirements as a ratio based upon its liabilities. The federal funds rate is based on simple supply and demand for these federal funds. The rate fluctuates, and so, at its eight yearly meetings, the FOMC sets a target rate.

Changes to the federal funds rate, both positive and negative, have a tremendous impact on every aspect of the financial markets. It affects short-term and long-term interest rates as well as foreign exchange rates. It also impacts broader economic variables, such as employment. For example, a lower fed funds rate makes borrowing more attractive for businesses so they can hire more workers, open new offices, increase output or production processes, etc.

Fed Funds Rate vs Discount Rate

It might seem confusing, but the federal funds rate is not the same as the discount rate. The discount rate is the rate of interest the Fed charges banks who borrow from it directly, and the method of accessing these funds is called the discount window. The Discount Rate is usually set at a higher rate of interest than the federal funds rate because the Fed wants to encourage banks to lend and borrow from each other. 

How Is the Federal Reserve Structured?

The Federal Reserve Board is made up of seven Governors, including its chair. It is based in Washington, DC. The 12 Federal Banks are organized by economic area. They monitor data and economic conditions broken down into the following regions:

  • Atlanta
  • Boston
  • Chicago
  • Cleveland
  • Dallas
  • Kansas City
  • Minneapolis
  • New York
  • Philadelphia
  • Richmond
  • San Francisco
  • St. Louis

When Is the Next Fed Meeting? Fed Meeting Calendar 2021–2022

The FOMC meets 8 times per year and additionally as needed. It publishes its policy statements on the same day as its meetings. Meeting minutes are then published 3 weeks later.

Upcoming 2022 FOMC Meeting Dates:

  • September 20–21, 2022
  • November 1–2, 2022
  • December 13–14, 2022

Frequently Asked Questions (FAQs):

Did you know the Federal Reserve operates independently from the federal government? Read on for more fascinating Fed FAQs.

Why Was the Fed Created?

A banking panic in 1907 caused a run on banking resources. Up until then, different financial crises would cause customers to literally run to the bank to withdraw their deposits, which devastated the banking industry. In 1913, Congress created the Federal Reserve Act, which established the Federal Reserve system as we know it. President Woodrow Wilson signed the act into law on December 23, 1913. 

Who Is in Charge of the Federal Reserve?

The Federal Reserve is not a federal entity. While the Federal Reserve was created by Congress, the Board of Governors is an independent agency, and the 12 Federal Reserve Banks are run like private corporations. 

How Does the Federal Reserve Increase the Monetary Supply?

When the Fed lowers the reserve requirement for a bank, it effectively creates more liquidity in the financial markets, thus increasing the monetary supply. Its Treasury security buybacks also increase reserves, putting more cash back into circulation. 

What Is the Maximum Employment Rate? And What Is the Desired Inflation Rate?

The Federal Reserve Bank of San Francisco defines “maximum employment” as an unemployment rate of 4% or less. A consistent average rate of 2% inflation is the target rate the Fed strives to maintain. 

How Does the Fed Affect the Stock Market?

Institutions and individuals alike typically view a decrease in interest rates as a cause to celebrate, and stock prices tend to rise as a result. Lower interest rates typically spur economic growth and add more money into consumers’ pockets, which, in turn, can fuel additional spending and, thus, growth. 

What Is a Federal Reserve Note? Is It Backed by Gold?

A Federal Reserve note is a currency issued by the Fed that’s backed by gold. These notes are usually worth their face value, although some historic notes, such as those from 1928, are more valuable. 

Are Federal Reserve Employees Federal Employees?

The Federal Reserve is independent of the federal government. Employees of the Federal Reserve are not federal government employees; they continue to work even in the event of a government shutdown.