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The Fed Today
The Federal Reserve System, or “the Fed” for
short, is our nation’s central bank. Since its
beginnings in 1913, the Fed’s main mission
has always been to establish and maintain
the public’s confidence in the monetary and
banking system of the United States.
But the confidence that exists today wasn’t
always there during much of our country’s
early history. At one time, the nation had
more than 30,000 types of currency, which
almost any organization—even drugstores—
could issue. The confusion was compounded
because people could redeem some currencies for gold and silver, while government
bonds backed other types of currency. To
make matters worse, many banks often
didn’t have enough money on hand to pay
their depositors.

The Eccles Building
in Washington, D.C.,
houses the Board of
Governors of the
Federal Reserve
System.

Something had to be done.

History
Congress drafted the Federal Reserve Act in
1913, creating the Federal Reserve System to
establish order and confidence in the
country’s monetary and banking system.

President
Woodrow Wilson
signed the Federal
Reserve Act in
December 1913.

The act had its beginning in 1908, when
Congress set up the National Monetary
Commission to pinpoint weaknesses in the
nation’s financial system.
The commission found that the United States
lacked a reliable method to provide liquidity
to the money supply. The country needed an
“elastic currency,” which means we needed to
be able to increase or decrease the growth of
the money supply when necessary.

President Woodrow Wilson signed the Federal Reserve Act into law on
Dec. 23, 1913, giving the Fed the responsibility of providing the country
with a safer and more flexible financial system.
Since the act was signed, the Fed’s original mission has expanded to
include helping maintain a stable, healthy and growing economy.

Structure
The Fed is a “decentralized
central bank”—a distinctively
American version of a central
bank, with a unique public/
private structure. The Fed is
governed by a seven-member
Board of Governors appointed by
the president and confirmed by
the Senate. The Board represents
the public sector, or governmental
side, of the Fed.
The Fed also includes 12 regional
Reserve Banks. Each regional Fed
has a board of directors consisting

of local citizens who represent
the private sector. These
directors come from all walks
of life: bankers, business
owners, educators, farmers
and other professionals. This
decentralized structure provides accountability but
avoids centralized governmental control of the country’s
banking and monetary policy.
By working in the communities, economic experts at the
Reserve Banks are able to give
Fed leaders in Washington
regional perspectives that are
blended into a national economic picture.
The Fed receives
no government
funding, paying
instead for its
activities with
interest earned
from investments in government securities,
loans to banks
and charges for
services provided to financial institutions.

The 12 Federal Reserve Districts

Each year the Fed generates enough revenue to cover its costs and turns
all excess income over to the U.S. Treasury.
The Fed operates independently within the government. As in any corporation, the Fed has stockholders. All nationally chartered banks hold
stock in the Federal Reserve. State-chartered banks may choose to join the
Fed and likewise own stock. Unlike stockholders in a public company,
banks cannot sell or trade their Fed stock. They also do not control the
Fed; however, they elect six of the nine board members of the Reserve
Bank in their district.
Today’s regional Reserve Banks work with the Board of Governors to
establish and implement monetary policy and are responsible for supervising banks and bank holding companies. The regional Feds also provide a variety of financial services to banks and other deposit-taking
financial institutions.

Monetary Policy
The Fed’s foundation rests upon developing
and implementing a sound monetary policy
whose primary focus is price stability.
The Federal Open Market Committee
(FOMC) is the group that establishes monetary policy. The committee comprises the
seven governors and the 12 Reserve Bank
presidents. The Fed chairman, who reports
regularly to Congress, heads the committee.
Five of the 12 Reserve Bank presidents have
voting authority. The president of the New
York Fed is a permanent voting member and
serves as the FOMC’s vice chairman. The
other four votes rotate every year among the
other 11 presidents.
The committee makes decisions that affect
the amount of available money and credit.
For example, if the FOMC sees signs of
inflationary pressures that may affect price
stability, the committee may move to slow
the growth of the money supply.

Meeting room of FOMC
in Washington, D.C.

As the money supply grows, so does the
demand for goods and services. When more
money is available, people tend to spend
more. However, when the production of
goods and services can’t keep up with the
growth in demand, prices usually begin to
rise—that is, inflation occurs.
If there is an indication that inflation is
threatening purchasing power, the Fed may
need to slow the growth of the money
supply. It does this by using three tools—the
discount rate, the reserve requirement and,
most important, open market operations.
Conversely, if the money supply and the
demand for goods decrease, people buy less;
prices could fall and businesses would
produce fewer goods. In this case, we could
have an economic slowdown—or, worse, a
recession.

The Discount Rate
The discount rate is the interest rate the Fed
charges financial institutions for short-term
loans of reserves. Changing the discount rate
can inhibit or encourage a financial
institution’s lending and investment activities by sending a signal about the Fed’s goals
and by indirectly influencing the interest
rates banks pay depositors and at which
they offer loans.

The Reserve Requirement
The reserve requirement is the percentage of checking account deposits
that financial institutions must set aside in reserve. If the Fed raises the
reserve requirement, banks have less money to lend, which restrains
growth of the money supply. If the Fed lowers the reserve requirement,
banks have more money to lend and the money supply increases.
The Fed rarely changes the reserve requirement. In fact, it is the least
used monetary policy tool because changes in the reserve requirement
significantly affect the way financial institutions operate. Reserve requirement changes are seen as a sign that monetary policy has swung strongly
in a new direction.

Open Market Operations
The Fed’s primary tool for fighting inflation and recession is open market
operations. Acting through banks and government securities dealers,
the Fed buys and sells U.S. government securities on the open market to
influence short-term interest rates and the growth of money and credit.
When the Fed determines that too much money and credit are available
in the market and inflationary pressures are rising, the Fed will sell
securities to banks and dealers. As a result, banks have less money to
loan to the public. With excess money and credit taken out of the financial system, inflationary pressures are reduced, thus stabilizing the
economy.
If too little money is available in the financial system, which could lead to
an economic slowdown or recession, the Fed buys securities. The funds
the Fed uses to purchase the securities will eventually arrive at local
banks, which then have more money to lend. This process moves money
into the financial system and stabilizes the economy.
Through both the selling and buying of securities, the goal is a stable
economy with higher employment and production, steady growth and
overall stable prices.

Banking Supervision
Prior to the Fed’s creation, the United States had neither a uniform
currency nor a way to ensure that banks and other financial institutions
stayed solvent. Throughout the 1800s and early 1900s, banks found
themselves in precarious situations when many customers showed up on
the banks’ doorsteps demanding their money.
Today Congress establishes rules that govern the supervision and regulation of banks that operate in the United States.
The Fed works with other government agencies to make sure banks
follow the rules and laws. This hands-on experience provides the Fed
with essential knowledge for setting monetary policy and forestalling or
managing financial crises.
The Fed monitors banks, bank holding companies and U.S. operations of
foreign banks to ensure their safety and soundness so that the public’s
confidence remains high. Examiners based in the regional Reserve Banks
periodically study a bank’s records to determine the bank’s financial
condition and whether it is following appropriate laws and regulations.
The Fed will require the bank to correct any problems.
Today’s examinations are part of an ongoing process in which examiners
perform their duties either from their own offices with the latest in
automation or by going directly to the banks.

Financial Services
The Fed is referred to as the “banker’s bank”
because it provides essentially the same
services to banks that banks provide to their
customers. For example, regional Feds can
loan money to banks and charge them an
interest rate, just like banks loan money to
their customers.

Through the Fed’s discount and credit operations, Reserve Banks provide
cash to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. The Fed also provides cash
to banks for longer-term solutions in exceptional circumstances. When
lending money to banks, the Fed charges a discount rate, much as a bank
charges an interest rate for a house or car loan.
These services contribute to an effective functioning of the banking
system, alleviate pressure in the reserve market and reduce unexpected
movements in interest rates. Moreover, adjustments to the basic discount
rate can be an important indicator of impending monetary policy shifts.
The Fed is not only the banker’s bank, it’s also the U.S. government’s
bank, maintaining accounts and providing services for the Treasury
Department. Federal taxes are deposited at the Fed. The Reserve Banks
also handle the sale and redemption of government securities to help the
Treasury finance the national debt. These Treasury bills, notes and bonds
are sold to the public and financial institutions.
Every day, Reserve Banks process billions of dollars in currency, checks
and electronic payments. As a result, the Fed plays a vital role in the
nation’s payment system.
It’s up to the Fed to make sure there’s always enough money in circulation. This means issuing currency and coin to banks and ensuring that
currency is in good condition. The Fed removes and destroys damaged,
counterfeit or worn-out currency and coins.
One of the Fed’s busiest operations is check clearing—an around-theclock operation. Millions of checks are sorted, tabulated and credited or
debited daily to financial institution accounts .

Conclusion
The Fed is a uniquely American version of a
central bank, fulfilling major responsibilities
important to the nation’s well-being—
fighting inflation, setting monetary policy,
serving as the banker’s bank and supervising financial institutions. In fact, emerging
democracies around the globe use the Fed as
a model to develop their own monetary
policies.
These countries look to the Fed’s success at
instilling confidence in our nation’s money
and its success at achieving price stability—
the foundation for a stable and growing
economy and better living standards for its
citizens.

“To keep prices steady,
keep jobs and production both coming,
the job of the Fed,
when all’s done and said,
is to keep the economy humming.”
— Charles Osgood
Radio and Television Commentator
Narrator, The Fed Today video

Federal Reserve Districts and Branches
1A
Boston
2B
New York
Buffalo

6F
Atlanta
Birmingham

Denver

Jacksonville

Oklahoma City

Miami

Omaha

Nashville
New Orleans

3C
Philadelphia
4D
Cleveland
Cincinnati
Pittsburgh

5E
Richmond

7G
Chicago
Detroit

8H
St. Louis

11K
Dallas
El Paso
Houston
San Antonio

12L
San Francisco

Little Rock

Los Angeles

Louisville

Portland

Memphis

Salt Lake City
Seattle

Baltimore
Charlotte

10J
Kansas City

9I
Minneapolis
Helena