As inflation began to accelerate in late 2021 and interest rates began to skyrocket in early 2022, news outlets have regularly written about the Federal Reserve (Fed) and the actions they have taken over the past few years. To understand what the Fed is and their specific role as an agency of the U.S. government, let’s pull back the curtain and take a deeper dive into the inner workings of the Fed.
The Federal Reserve, the central bank of the U.S., was created by the Federal Reserve Act of 1913 to establish a system to respond to stresses within the U.S. banking system. The Fed’s primary goals are set forth by congress and are known as its dual mandate– promote maximum employment and stable prices.
There are 3 main entities within the Fed – the Federal Reserve Board of Governors, the 12 Federal Reserve banks, and the Federal Open Market Committee (FOMC). The Board of Governors is comprised of 7 members, or governors, who are nominated by the President of the United States and confirmed by the United States Senate. Their chief roles are to oversee the operation of the Federal Reserve System and fulfill the duties and responsibilities set forth in its creation document, the Federal Reserve Act of 1913. As an agency of the federal government, they report directly to the United States Congress. The chair of the Federal Reserve, currently Jerome Powell, reports to congress twice a year and testifies on numerous topics including the Fed’s current and projected monetary policy stance. The chair also meets periodically with the Secretary of the Treasury.
The 12 Federal Reserve banks are the operational banks of the Fed, along with their 24 branches across the nation. These 12 banks operate within specific geographical areas, also known as districts or regions. The chief responsibilities of the banks are to supervise and examine banks and other financial institutions, enforce compliance with consumer protection laws, and lending to depository institutions to ensure liquidity within the financial system.
The FOMC is a 12-member group of officials from around the Fed system that set U.S. monetary policy at Fed meetings held 8 times per year, 4 of which sees the release its Summary of Economic Projections - a summary of the FOMC’s voting members’ projections for inflation, interest rates, unemployment, and GDP growth. Members include the 7 members of the Board of Governors, the president of the Federal Reserve Bank of NY and 4 of the remaining 11 Federal Reserve bank presidents on a rotating basis. Monetary policy, which affects interest rates and credit conditions, can have wide sweeping effects on financial conditions throughout the economy. The Fed’s setting of monetary policy influences short-term interest rates and overall financial strength throughout the economy, something that has been front and center since the Fed began its rate hiking campaign in early 2022. The FOMC is also responsible for enacting open market operations – selling or purchasing government securities (e.g., Treasury bills) in the open market to reduce or increase the money supply in the economy.