Federal Reserve System
The Federal Reserve System is a complex network of national and regional banking institutions that has the power to control our nation’s money supply. The Fed affects everything from the rates of interest we pay on savings to the cost of the money we use to buy things.
The Fed has three key goals: maximizing employment, stabilizing prices and moderating long-term interest rates. The Fed also provides many other services to depository institutions, the U.S. government and foreign official institutions.
Congress created the Fed in 1913, along with a central governing board called the Board of Governors and twelve regional Federal Reserve Banks, known as Districts. The Districts are based in cities such as Kansas City and operate independently of the Board of Governors, but share common financial policies and objectives with other Federal Reserve Banks. Each District is headed by a regional Federal Reserve Bank president.
The Federal Reserve System
As part of the Federal Reserve Act, Congress established three key goals for the Federal Reserve: maximizing employment, stabilizing prices and moderately moderating long-term interest rates. This broad set of objectives has become known as the Federal Reserve’s dual mandate.
Monetary policy is carried out mainly through the Federal Funds Rate, which is a target that the Fed sets and then tries to align with the overall economy. The Fed’s other primary tools include the discount rate, the overnight reverse repurchase agreement (ON RRP) rate and open market operations. Each of these moves in the same direction as the federal funds rate, helping to guide it.
By changing the discount rate, the Fed can change the amount of interest banks earn when they keep cash in their accounts at the Fed overnight, or in other words, how much it costs them to borrow from one another. By setting the ON RRP rate, the Fed can encourage or discourage nonbank financial institutions that don’t qualify to earn interest on their reserves from lending cash in the market. Finally, by setting the federal funds rate, the Fed can incentivize banks to lend or borrow within a specific target range.
To change the federal funds rate, the Fed uses a variety of tools, including buying or selling bonds in the open market. This helps to keep the supply of overnight reserves plentiful so that banks can easily borrow money to finance their operations.
The Federal Reserve Board of Governors consists of seven members who are appointed to 14-year terms by the president and confirmed by the Senate. The Board oversees the Federal Reserve System, issues regulations under most federal consumer credit protection laws and has a general responsibility for the U.S. payments system and the activities of its various regional Federal Reserve Banks and branches. The Board meets eight times a year to discuss monetary policy and other matters. More information about the Board is available on its website. The Federal Reserve also publishes a number of useful publications about the economy, including its Beige Book and FRED database.