U.S. Federal Reserve System

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Federal Reserve System
Gov federal reserve system logo.jpg
Founded 1913

The U.S. Federal Reserve System ("the Fed") is the central banking system of the United States. It was established by an act of Congress in 1913[1] when President Woodrow Wilson signed the Federal Reserve Act into law on Dec. 23 of that year.[2]

The Fed is composed of the Federal Reserve Board and 12 Federal Reserve Banks. Its primary purpose is to regulate the flow of money and credit in the country through the implementation of monetary policy. Even though the Fed is accountable to Congress and its goals are set by law, its conduct of monetary policy is insulated from day-to-day political pressures.

Federal Reserve Board[edit]

Jerome Powell is the current chairman of the Federal Reserve Board. He succeeded Janet Yellen, who became chairman in 2014, succeeding Ben Bernanke. The other members of the current board Richard H. Clarida, Randal Quarles, Lael Brainard, and Michelle W. Bowman.[3]

The seven members of the Board of Governors are appointed by the U.S. president and confirmed by the Senate to serve 14-year terms of office. Members may serve only one full term, but a member who has been appointed to complete an unexpired term may be reappointed to a full term. The president designates, and the Senate confirms, two members of the board to be chairman and vice chairman, for four-year terms.

The seven Board members constitute a majority of the 12-member Federal Open Market Committee (FOMC), the group that makes the key decisions affecting the cost and availability of money and credit in the economy. The other five members of the FOMC are Reserve Bank presidents, one of whom is the president of the Federal Reserve Bank of New York.

Member Banks[edit]

The nation's banks can be divided into three types according to which governmental body charters them and whether or not they are members of the Federal Reserve System. Those chartered by the federal government (through the Office of the Comptroller of the Currency in the Department of the Treasury) are national banks, and by law are members of the System.

Banks chartered by the states are divided into those that are members of the System and those that are not. State-chartered banks are not required to join the System, but they may elect to become members if they meet the standards. As of June 30, 2006, there were a total of 7,480 commercial banks nationwide, of which 2,548 were members of the System. The Federal Deposit Insurance Corporation is responsible for supervising non-member banks.

Member banks must subscribe to stock in their regional Federal Reserve Bank in an amount equal to 3 percent of their capital and surplus. They receive a 6 percent annual dividend on their stock and may vote for Class A and Class B directors of the Reserve Bank. However the stock does not carry with it the control and financial interest that is normal for the common stock of a for-profit organization. It offers no opportunity for capital gain and may not be sold or pledged as collateral for loans. The stock is merely a legal obligation that goes along with membership.[4]


In addition to monetary policy responsibilities, the Federal Reserve Board has regulatory and supervisory responsibilities over banks that are members of the System, bank holding companies, international banking facilities in the United States, Edge Act and agreement corporations, foreign activities of member banks, and the U.S. activities of foreign-owned banks. The Board also sets margin requirements, which limit the use of credit for purchasing or carrying securities.

It is responsible for maintaining the stability of the financial system and containing systemic risk that may arise in the financial markets and plays a key role in assuring the smooth functioning and continued development of the nation's extensive payments system.[5]

Another area of Board responsibility is the development and administration of regulations that implement major federal laws governing consumer credit such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Truth in Savings Act.

Coordinated Action With Other Central Banks[edit]

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank in November of 2011 announced coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions was to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

The central banks agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate would be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing would be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements was extended to Feb. 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank would continue to offer three-month tenders until further notice.

As a contingency measure, the central banks agreed to establish temporary bilateral liquidity swap arrangements so that liquidity could be provided in each jurisdiction in any of their currencies should market conditions warrant the situation.[6]


The Board usually meets several times a week. Meetings are conducted in compliance with the Government in the Sunshine Act, and therefore many meetings are open to the public. If the Board convenes to consider confidential financial information, however, the sessions are closed to public observation.

Notable Actions[edit]

In March, 2020, the Federal Reserve announced unusual and historic steps to address the deep dysfunction in the US financial system due to the COVID-19 pandemic. Chairman Jerome Powell said on NBC's Today Show, "Many places in the capital markets, which support borrowing by households and businesses -- I’m talking about mortgages and car loans and things like that -- have just stopped working. So we can step in and replace that lending under our emergency lending powers." [7]


  1. The Board of Governors of the Federal Reserve System. Federal Reserve.
  2. Federal Reserve History. Federal Reserve.
  3. Federal Reserve Board. U.S. Federal Reserve.
  4. The Federal Reserve System. Money: What It Is, How It Works.
  5. Why We Need the Fed. The Atlantic.
  6. Press Release. FRB.
  7. Bloomberg. The Fed Brings the Global Financial System Back From the Abyss.