Federal Reserve (the Fed)
The U.S. Central Bank
The U.S. Central Bank
The Federal Reserve, more commonly referred to ‘the Fed’, is the central bank of the United States of America and is hence the supreme financial authority behind the world’s largest free market economy. Because of the magnitude of the US’ influence on the global economy, ‘the Fed’ is considered one of the most influential financial institutions in the world.
The Federal Reserve, in addition to being the financial adviser and regulator of the US Government, handles the monetary policies of the government independently and without legislative intervention. In addition to that, it performs all other functions of a central bank – regulating bank activities, conducting surveys about the US and global economy – all under the common objective of maintaining financial stability.
The Federal Reserve is headquartered in Washington D.C.
The Fed was born indirectly out of the “Panic of 1907,” and the overall economic situation of that time. The last quarter of the 19th century and the beginning of the 20th century were characterized by recessions in the US economy. A series of financial panics forced eminent bankers like J.P. Morgan and John D. Rockefeller Jr. to call for a new central banking system.
The country’s dire financial situation then prompted Republican Senator Nelson Aldrich to set up two separate commissions to study the American monetary system and the European central banking institutions. Aldrich was highly influenced by the model of the Bank of England and the German monetary system. Although his initial proposals were repeatedly rejected by Congress, a reformatted bill was finally passed on December 22, 1913.
The Federal Reserve is the central bank of the United States and thus, is responsible for maintaining the overall stability of the country’s economy.
The Federal Reserve cetnral bank is a multi-layered financial body, deriving its authority and spirit from the Federal Reserve Law of 1913. Despite being an executive agency, the financial body is largely independent of the control of the President or Congress and is hence described as being “independent within the Government.” The Federal Reserve’s four main axes of power include the following:
A seven-member Board of Governors oversees the overall responsibilities of the monetary body as a central bank – managing the activities of 12 regional banks, framing monetary policies, and supervising the economy in general. Each member of the Board is appointed by the President on 14-year terms, while the Chair and the Vice-Chair are appointed by the Board for four-year terms. At present, three of the seven places on the Board are vacant.
The Federal Open Market Committee (FOMC) is the committee in charge of handling open market operations, which is an important component of monetary policy. It is a 12-member committee, consisting of all seven members of the Board of Governors, and the Presidents of any five of the regional banks. The representatives of the regional banks are chosen for two to three-year terms, while the President of the Federal Reserve Bank of New York is a permanent member.
The regional Federal Reserve Banks, 12 in number, are tasked with carrying out the monetary policies as prescribed by the Board. A nine-member board sits on each bank, with an internal President. Each of these banks carries on its own operations besides its regulatory role, holding securities and giving out loans.
A member bank is a private financial institution that owns stock in its regional Federal Reserve Bank, earning profits from the stock. From the profit that the stock earns, the banks receive a 6% dividend, while the rest of the profit goes to the US Treasury.
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