Federal Reserve - Frequently Asked Questions (FAQs) (2023)

What is the purpose of the Federal Reserve?
The Federal Reserve System, the Federal Reserve or “the Fed”, is the central bank of the United States. The Fed has several important functions:

  • Conducts monetary policy. Influences money and credit conditions in pursuit of full employment and stable prices.
  • Supervises and regulates banks and financial institutions. Ensures the financial system is safe and sound; protects consumer credit rights.
  • Maintains stability of the financial system. Contains systemic risk in financial markets.
  • Provides financial services. Customers include the U.S. government and financial institutions, and foreign official institutions.
  • Oversees the payments system.

How is the Federal Reserve System structured?
The Fed’s structure includes a central governing board, 12 Reserve Banks and a policy arm. It combines public and private characteristics.

Board of Governors

What is the Board of Governors?
The Board of Governors is the Fed’s governing body. The U.S. President nominates — and the U.S. Senate confirms — the seven members or “governors.” The Board is a federal agency that reports to — and is accountable to — Congress. The Federal Reserve Act gives the Board in Washington, D.C., oversight of the 12 Reserve Banks.

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Is the Federal Reserve accountable to anyone? Are they audited?
Yes. The Board of Governors is a federal government agency that reports to — and is accountable to — Congress. It provides general guidance and oversight for the 12 Reserve Banks.

  • The Government Accountability Office (GAO) reviews Federal Reserve activities.
  • The Office of Inspector General (OIG) retains a firm to audit the Board of Governor’s financial statements.
  • The OIG audits and investigates Board programs and operations, and functions delegated to the Reserve Banks. The Board of Governor’s Annual Report lists completed and active GAO reviews, and OIG audits, reviews and assessments.
  • OIG’s outside firm audits Reserve Bank financial statements yearly.
  • Reserve Bank directors oversee their internal audit function.
  • The Fed publishes weekly a statistical release of its balance sheet, charts of balance sheet trends and an interactive guide.
  • The Board of Governors performs an annual examination of the Reserve Banks.
  • The Board of Governor’s Annual Report and financial statements are public.

How is the Fed “independent within the government”? How is it funded?
The Fed is an independent government agency but accountable to the public and Congress. The chair and Board of Governor’s staff testify before Congress and submit a Monetary Policy Report twice a year. Independently audited financial statements and FOMC meeting minutes are public.

Who are the members of the Board of Governors?
Visit Board of Governor’s members and bios.

Can the Federal Reserve give to charitable organizations?
No. The Fed cannot give or lend money to individuals, private businesses or charitable organizations.

Reserve Banks

What are Federal Reserve Banks? What do they do?
As the operating arms of our nation’s central banking system, Federal Reserve Banks:

  • Help the Federal Reserve conduct monetary policy.
  • Supervise and examine member banks for safety and soundness.
  • Store the cash reserves of depository institutions and loan them funds.
  • Move currency and coin into and out of circulation.
  • Collect and process millions of checks each day.
  • Provide checking accounts for the U.S. Treasury.
  • Issue and redeem government securities, and act as a fiscal agent for the U.S. government.
  • Strengthen the economy of the communities they serve.

How many Reserve Banks are in operation and where?
Twelve Reserve Banks operate in geographical areas known as Districts.

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  • First District — Boston. Connecticut (excluding Fairfield County), Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.
  • Second District — New York. New York State, 12 counties in northern New Jersey, Fairfield County in Connecticut, Puerto Rico and the Virgin Islands.
  • Third District — Philadelphia. Eastern Pennsylvania, southern New Jersey and Delaware.
  • Fourth District — Cleveland. Ohio, western Pennsylvania, eastern Kentucky and the northern panhandle of West Virginia.
  • Fifth District — Richmond. Maryland, Virginia, North Carolina, South Carolina and most of West Virginia.
  • Sixth District — Atlanta. Alabama, Florida, Georgia, and parts of Louisiana, Mississippi and Tennessee.
  • Seven District — Chicago. Iowa and most of Illinois, Indiana, Michigan and Wisconsin.
  • Eight District — St. Louis. Arkansas and parts of Missouri, Mississippi, Tennessee, Kentucky, Indiana and Illinois.
  • Ninth District — Minneapolis. Minnesota, Montana, North Dakota, South Dakota, 26 counties in northwestern Wisconsin and the Upper Peninsula of Michigan.
  • Tenth District — Kansas City. Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and Western Missouri
  • Eleventh District — Dallas. Texas, northern Louisiana and southern New Mexico.
  • Twelfth District— San Francisco. Nine western states — Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah, and Washington--and American Samoa, Guam, and the Northern Mariana Islands.

Why is there only one District located along the West Coast?
The Reserve Banks opened for business on November 16, 1914. The geographic population determined their boundaries and location. Reserve Banks added branch officers to serve local needs. The Richmond Fed has branches in Charlotte, North Carolina, and Baltimore, Maryland.

How are the Reserve Banks governed?
The Board supervises Reserve Banks.

Board of Directors
A nine-member board of directors supervises each Reserve Bank. Reserve Banks each have at least one branch office with its own director board. The Board appoints Class C directors representing agriculture, commerce, industry, services, labor and consumers, and designates the chair and deputy chair from this class. Reserve Bank member banks elect Class B and A directors from their District. Class B directors represent the public and Class A directors represent the member banks.

Bank President
A Reserve Bank president is the chief executive officer and serves a five-year term. A Reserve Bank’s board of directors select the president with the approval of the Fed’s governing Board.

The 12 Reserve Banks presidents’ terms run concurrently, ending on the last day of February in years ending with one and six such as 2001, 2006 and 2011. A president who takes office after a term has begun completes his term when it ends. A president may be reappointed after serving a full or partial term, but is subject to mandatory retirement upon becoming 65 years of age. A president appointed after age 55, at the option of the Reserve Bank’s directors, may serve until attaining 10 years of service in the office or age 70, whichever comes first.

Are Reserve Bank employees government employees?

FOMC and Monetary Policy

What is the Federal Open Market Committee? What does it do?
The Federal Open Market Committee (FOMC) is a 12-member body of the seven governors and five of the 12 Reserve Bank presidents. The Fed Board chair serves as the chair of the FOMC, and the New York Fed president is a permanent member and serves as the vice chairman of the Committee. Reserve Bank presidents fill the remaining four voting positions on a rotating basis. All presidents attend FOMC meetings and discuss the economy and policy options.

What is monetary policy?
The FOMC’s actions to achieve full employment, stable prices and moderate long-term interest rates.

How does the Fed conduct monetary policy?
It conducts monetary policy through open market operations, and the setting of the discount rate and requirements on reserve funds.

  • Open market operations — the buying and selling of U.S. Treasury and federal agency securities — are the Fed’s principal tool for implementing monetary policy. The Federal Open Market Committee determines the short-term objective for open market operations. Policymakers may aim for a desired quantity of reserves, or a desired price known as the federal funds rate.
  • Reserve Banks’ charge a discount rate or interest rate to commercial banks and other depository institutions when they make short-terms loans through the discount window. The directors determine the discount rate and the Board approves it. The Fed’s three discount window programs have their own interest rate and include primary credit, secondary credit and seasonal credit.
  • Reserve requirements are the amount of reserve funds held at a Reserve Bank to offset deposit liabilities. The Board determines the reserve requirement. Reserve Banks pay interest on reserve balances and excess balances.

What is the federal funds rate? Why does the FOMC change the target rate?
The federal funds rate is the interest rate depository institutions charge each other to borrow funds from Reserve Bank balances.

The Federal Open Market Committee changes the target federal funds rate based on its goals of full employment, price stability and moderate long-term interest rates. Rate changes can affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit in the economy, as well as employment, goods and services, and prices.

What is the money stock? How does the Fed influence it?
Money stock consists of M1 and M2. M1 is a defined measure of the most liquid forms of money — currency and checkable deposits. Non-M1 components of M2 include household holdings of savings deposits, small time deposits and retail money market mutual funds (M2 includes M1.). The Fed affects the money stock or money supply by changing the federal funds rate or interest rate.

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Policymakers influence money stock by lowering the target federal funds rate — the rate depository institutions buy and sell overnight funds to one another — in the market, which causes other short-term rates fall. Lower short-term market interest rates increase the attractiveness of the rates paid on deposits at commercial banks and other depository institutions, because changes in these rates tend to lag changes in market rates. As a result, the public tends to buy the assets included in the money stock, and money growth increases. Raising the target federal funds rate increases both the federal funds rate and other short-term interest rates. The rates paid on assets included in the money stock become less attractive and money growth slows.

What do the policymakers forecast?
Policymakers forecast economic growth, unemployment and inflation. There forecasts are available publically in the Summary of Economic Projections, which includes the:

  • Percent change in gross domestic product adjusted for inflation (real GDP).
  • Percent change in the price index for personal consumption expenditures (PCE inflation).
  • Percent change in the price index for PCE excluding food and energy (core PCE inflation).
  • Change in real GDP and prices from the fourth quarter of one year to the fourth quarter of the next.
  • Unemployment rate — the average civilian unemployment rate — in the fourth quarter of a year.
  • Appropriate path of monetary policy to promote full employment and stable prices.

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Federal Reserve - Frequently Asked Questions (FAQs)? ›

The U.S. central banking system—the Federal Reserve, or the Fed—is the most powerful economic institution in the United States, perhaps the world. Its core responsibilities include setting interest rates, managing the money supply, and regulating financial markets.

What are 3 things the Federal Reserve is responsible for regulating? ›

The U.S. central banking system—the Federal Reserve, or the Fed—is the most powerful economic institution in the United States, perhaps the world. Its core responsibilities include setting interest rates, managing the money supply, and regulating financial markets.

What are permissible non-bank activities? ›

Permissible non-bank activities are a set of functions that financial holding companies can engage in, but which traditional banks cannot. These include activities like insurance underwriting, securities dealing, and investment advisory or brokerage services.

What is one of the most important things that the Federal Reserve does? ›

Supervising and Regulating Financial Institutions and Activities. The Federal Reserve promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole.

What the Federal Reserve Cannot do? ›

Remember, they can't set federal funds or prime interest rates, but they can bend them to their will through OMO. The Fed buying back government bonds from banks leaves more money for banks to play with while selling them means banks have to be more cautious about lending out their reserves.


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