Federal Reserve

US Federal Reserve System

The Federal Reserve System, or the “Fed” as it is informally known, is the United States’ central bank. In the Federal Reserve Act, by which the system was set up in 1913, Congress instituted three major goals for its monetary policy: stable prices, maximum employment, and interest rates that remain moderate in the long-term.

Twelve regional Federal Reserve banks are situated in key cities all through the country, and the Federal Reserve System’s structure is made up of these 12 banks, a presidentially selected board of governors, the Federal Open Market Committee, several privately owned affiliated banks and different advisory councils.

Influential bankers started lobbying for a central bank in the 1890s. Although top bankers of the day were trying to serve their own interests, they supported the idea of a central bank that wielded the same authority as a government-run bank, but which was owned and financed by private entities and run by private individuals. The term ‘central bank’ wasn’t a popular one, so instead the system became known as the ‘Federal Reserve.’


The Federal Reserve System conducts US monetary policy and preserves the stability of its financial system, it regulates and supervises commercial banks and protects the credit rights of customers. Financial institutions both local and foreign, the United States Government, and the American public all rely on the Fed for various financial services, including their function of lending money to the nation’s commercial banks. This is the only US bank with the authority to issue Federal Reserve notes, which constitutes all the paper money in circulation in America.

The President of theUnited Statesnominates the members of the system’s board of governors, and the US Senate confirms these nominations. These appointments must, by law, fairly represent the agricultural, financial, commercial and industrial interests of the country, and no two governors may come from the same Federal Reserve District.

The Fed can manipulate the financial system through the market for balances that financial institutions keep in their accounts at the regional Federal Reserve banks. These regional banks offer a variety of central bank programs to make tools and information available to help financial institutions meet reporting requirements, understand procedures governing reserve requirements and become acquainted with discount window lending programs.

The system supervises, on a continuous basis, the reliability and safety of all financial institutions that make use of payment services and the discount window provided by the Fed. At the centre of this supervisory process is its rating system, which offers a structure for spotting institutions that can create excessive risks to the Fed. Any applications for credit made to the Fed must secured to the satisfaction of the lending reserve bank by collateral that it deems “acceptable.”

The system’s seven-member Board of Governors sets member banks’ reserve requirements within limits established by statute. It also reviews and settles on the discount rates set up by the 12 Federal Reserve banks, and goes over their budgets. The 12 Federal Reserve banks are situated in New York City, Boston, Philadelphia, San Francisco, Chicago, Richmond, Cleveland, Atlanta, Minneapolis, St. Louis, Kansas City and Dallas.

flickr image by by rlinger