TABLE OF CONTENTS
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Structure and Organization of the System. . . . . . . . . . . . . . . . . . . . 2
System Functions and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Monetary Policy and Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . 11
Financial Supervision and Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . 19
Payments Services for Financial Institutions . . . . . . . . . . . . . . . . . . . . 24
Banking Services for the U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . 27
Consumer Protection and Education. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Reprinted with a new foreword, January 2012.
ForewordThe Federal Reserve System, often called the Fed, is the centralbank of the United States. As the nation's central bank, the Fedhas three well-known responsibilities: conducting monetarypolicy, supervising and regulating financial institutions, andproviding services to financial institutions. In addition to thesefunctions, the Fed also acts as the fiscal agent for the U.S. Treas-ury and is engaged in consumer protection activities.
The actions of the Federal Reserve System affect everyone.Economic conditions in the United States and worldwide are im-pacted by how well the Fed does its job. Promoting the integrityof our financial institutions, the efficiency of our payments sys-tems, the adequacy of our money and credit, and the purchasingpower of our dollar are all responsibilities of the Fed.
The Fed's principal goal of economic stability has not changedsince its creation in 1913 with the passage of the Federal ReserveAct. Its role, however, has grown a great deal. Just in the pastdecade, Fed functions changed and expanded to deal with dra-matic transformations in financial institutions, paymentsprocesses and markets.
As the reprint of this publication goes to press, the Fed finds itselfin another time of great change. In response to the financial crisisthat peaked in late 2008, Congress passed the Dodd-Frank WallStreet Reform and Consumer Protection Act (Dodd-Frank Act) of2010. The Dodd-Frank Act established new responsibilities for theFed and other financial regulators, placed new limits on thepermissible activities of financial firms and called for the creationof new agencies, including the Consumer Financial ProtectionBureau. With hundreds of elements of the Dodd-Frank Act con-nected to or directly affecting the Federal Reserve, interpretation,rule-writing and implementation will take time.
Still, the Feds primary objectives discussed in this 16th edition ofThe Federal Reserve Today remain as relevant to our daily lives asthey have ever been. More than 40 years have passed sinceRobert P. Black, then an economist and later president of theFederal Reserve Bank of Richmond, wrote the text for the firstedition of this publication. This 16th edition is the story of theFed today its structure, its objectives and its actions.
The Federal Reserve Today 1
The Fed and You
Throughout this editionof The Federal ReserveToday, look for boxesmarked The Fed andYou, for highlights ofhow the Feds actionsimpact you.
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FOMC
The Structure andOrganization of the SystemThe Feds actions affect the economy and therefore affect you.To ensure that the Fed remains accountable and free from polit-ical pressure, the Federal Reserve System is composed of publicand private elements. The Board of Governors of the FederalReserve System provides oversight to the 12 Reserve Banks andtheir branches. The Federal Open Market Committee (FOMC),the Feds monetary policymaking body, is made up of the mem-bers of the Board of Governors and presidents of the ReserveBanks. The Reserve Banks interact with more than 16,000 de-pository institutions that provide financial servicesto the public.
Board of GovernorsThe seven members of the Board are appointed by thepresident of the United States and confirmed by the U.S.Senate. The full term of a Board member is 14 years, andmembers who have served a full term may not be reappointed.
The president also appoints the chairman and vice chairman ofthe Board from among the seven Board members. The chair-man and vice chairman serve four-year terms and may be reap-pointed to these positions. The Boards seven governors serve asmembers of the Federal Open Market Committee.
Three advisory councils the Federal Advisory Council, theConsumer Advisory Council and the Thrift Institutions AdvisoryCouncil inform the Board on matters of current interest. Thesecouncils, whose members are drawn from each of the 12 Fed-eral Reserve Districts, meet three to four times a year.
The Federal Open Market CommitteeThe Federal Open Market Committee (FOMC) can affect overalleconomic activity through monetary policy. The FOMC setsmonetary policy by establishing a target for the federal fundsrate (the interest rate banks charge for overnight loans be-tween banks). While all seven members of the Board of Gover-nors and all 12 presidents of the Reserve Banks participate ineach FOMC meeting, voting rights rotate among some partici-pants. The seven members of the Board of Governors, the presi-dent of the New York Reserve Bank and the presidents of fourother Reserve Banks, who serve one-year rotations, vote onmonetary policy decisions.
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Reserve BanksThe 12 Reserve Banks are named after the locations oftheir headquarters Atlanta, Boston, Chicago, Cleveland, Dal-las, Kansas City, Minneapolis, New York, Philadelphia,Richmond, San Francisco and St. Louis. Each Bank is assigneda number and a corresponding letter. As the map on pages6 and 7 shows, the naming convention begins with the BostonFed, 1A, in the Northeast and continues south and west acrossthe country to the San Francisco Fed, 12L.
The Reserve Banks are quasi-governmental, or legally privatebut functionally public, corporations. Reserve Banks areowned by commercial banks in their region (that is, bankshold stock in their Federal Reserve Bank) but serve public goalsand are overseen by the Board of Governors, a government en-tity. While these member banks are considered owners ofthe Fed, they do not have many of the usual rights of stock-holders. For example, although 6 percent of their capital isinvested in the Reserve Banks, their dividend return on thisinvestment is fixed at 6 percent by law. The purpose of thisquasi-governmental arrangement is to ensure a central bankthat is both accountable to the American people and insulatedfrom political pressure.
The Reserve Banks carry out a number of important functions.Bank presidents contribute to the monetary policy discussionand vote on the direction of monetary policy during FOMCmeetings. While each president brings his or her own uniqueviews on the national economy to these meetings, one of thespecific roles of Reserve Banks is to reach out to local communi-ties within each District to gather information about the re-gional economy.
One channel through which Reserve Banks interact with thepublic and the banking industry is the Reserve Banks ownBoard of Directors. Each Reserve Bank is governed by a Boardthat represents both member banks and the nonbank public.These nine directors oversee Bank operations and provide Fedofficials with considerable "grassroots" information on businessand financial conditions. While the member banks elect theBoard of Directors, the Directors decisions are subject to reviewby the Board of Governors.
The Federal Reserve Today 3
There are12 Reserve Banks.
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The Fed and You
Every day people makeeconomic decisions. De-ciding what to purchase,how much to save andwhether to attend col-lege will impact your lifeand the larger economy.The Feds actions can af-fect the economic envi-ronment in which youmake these decisions.Therefore the Feds ac-tions, your decisions andthe economy are inter-connected.
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The entrepreneurs and leaders who sit on the Reserve Banksadvisory committees also provide vital community-level inputon the economy. These committees provide informationon matters pertaining to small business, agriculture, labor,community development and payments. Members of advisorycommittees represent a diverse range of industries and interestsin their Districts.
Reserve Banks also engage with the banking industry throughsupervisory activities and by providing payments services todepository institutions. The Reserve Banks support a number ofcommunity development and economic and financial educationprograms for the public. The Banks also work directly with theU.S. Treasury as its fiscal agent.
Member BanksApproximately 34 percent of the commercial banks in theUnited States are members of the Federal Reserve System.Nationally chartered banks are required to be members of theFederal Reserve System and state chartered banks may chooseto become members. Member banks are required to hold6 percent of their capital as stock in their Reserve Bank.
Other Depository InstitutionsIn addition to member banks, about 13,700 other depositoryinstitutions provide checkable deposits and other bankingservices to the American people. These include state-charteredcommercial banks, savings banks, savings and loan associationsand credit unions. Although not formally part of the FederalReserve System, these institutions have access to Fed financialservices and are subject to System regulations.
American PeopleThe American people play an integral role in the Federal Re-serve System. Voters elect the leaders who appoint membersto the Board of Gov
