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The Federal Reserve System, or simply the Fed, is the central bank of the United States. It was established in 1913 by the Federal Reserve Act, which was passed by Congress in response to a series of financial crises and bank failures that occurred in the late 19th and early 20th centuries. The main purpose of the Fed is to provide the nation with a safe, flexible, and stable monetary and financial system
The Fed has evolved over time to meet the changing needs and challenges of the U.S. economy. It has three key objectives for monetary policy: maximizing employment, stabilizing prices, and moderating long-term interest rates. These are sometimes referred to as the Fed’s dual mandate The Fed also performs other functions, such as supervising and regulating banks, maintaining the stability of the financial system, providing financial services to depository institutions, the U.S. government, and foreign official institutions, and conducting research and analysis on economic issues
The Fed is composed of several components. The Board of Governors, or Federal Reserve Board, is the governing body of the Fed. It consists of seven members who are appointed by the President and confirmed by the Senate for 14-year terms. The Board sets general policies for the Fed and oversees its operations. The Chair and Vice Chair of the Board are also appointed by the President and serve four-year terms. The current Chair is Jerome H. Powell, who took office in February 2018.
The Federal Open Market Committee, or FOMC, is the main policy-making body of the Fed. It consists of 12 members: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents of other regional Federal Reserve Banks who serve on a rotating basis. The FOMC meets eight times a year to review economic and financial conditions and decide on monetary policy actions.
The most important tool of monetary policy is the federal funds rate, which is the interest rate that banks charge each other for overnight loans of reserves. The FOMC sets a target range for this rate and uses open market operations to influence it. By changing the federal funds rate, the FOMC affects other interest rates in the economy and ultimately influences economic activity and inflation.
The 12 regional Federal Reserve Banks are located in major cities across the nation. They operate as independent corporations within the Fed system and are owned by their member banks, which are nationally chartered or state-chartered banks that meet certain requirements and hold stock in their respective Reserve Banks.
The Reserve Banks perform various functions for their districts, such as processing checks and electronic payments, distributing currency and coins, supervising and examining banks, conducting economic research and education, and serving as a lender of last resort to banks in times of emergency. Each Reserve Bank has a board of directors that oversees its administration and a president who is appointed by its board with approval from the Board of Governors.
The Fed also has several advisory councils that provide input and feedback on various aspects of its operations and policies. These include the Federal Advisory Council, which consists of 12 representatives from the banking industry; the Community Depository Institutions Advisory Council, which consists of 12 representatives from smaller banks, credit unions, and thrift institutions; the Community Advisory Council, which consists of 15 representatives from consumer, labor, community development, and other groups; and the Model Validation Council, which consists of five experts in econometrics and statistics who advise on the validation of models used by the Fed for stress testing banks.
The Fed operates independently from political influence but is accountable to Congress and the public for its actions. It reports regularly to Congress on its monetary policy decisions and objectives, its supervision and regulation activities, its financial stability efforts, its balance sheet and income statements, its audits and reviews, and other matters. It also publishes various reports and data on its website (www.federalreserve.gov) that are accessible to anyone interested in learning more about its operations and policies.
The Fed plays a vital role in maintaining the health and stability of the U.S. economy. It faces many challenges in fulfilling its mission in a complex and dynamic environment. Some of these challenges include managing inflation expectations, balancing short-term and long-term goals, dealing with uncertainty and risks, communicating effectively with various audiences, fostering financial innovation while mitigating potential threats, promoting diversity and inclusion within its workforce and leadership, and adapting to changing technologies and global developments.